The Pensions Green Paper: A Generational Accounting Perspective

Abstract

In this note we show how the policy proposals contained in the government's Green Paper on pensions (DSS, 1998) affect the long term sustainability of the UK's public finances and redistribution between current and future generations. Using the methodology of generational accounting we show that the proposals in the Green Paper will marginally increase the tax rise needed to ensure intertemporal solvency, and slightly worsen generational imbalances. The effect of implied changes in National Insurance Contributions, and the fiscal and generational implications of fully funding the proposed State Second Pension, are also discussed. One of the main tasks of a Welfare State is to guarantee an adequate standard of living in old age. In the United Kingdom the events of the 1980s and 1990s, namely, the decision to index benefits to prices and the various reforms to the State Earnings-Related Pension Scheme (SERPS), have ultimately paved the way for a problem of poverty in retirement (Atkinson, 1994). With the release of the Green Paper A New Contract for Welfare: Partnership in Pensions (DSS, 1998), the government has revealed its plans to reform the system of transfers to pensioners and avoid this problem. The measures in the Green Paper can be considered from a number of different angles: for example, how will they affect saving behaviour? to what extent do they redistribute between rich and poor? In this note we consider the fiscal and generational effects of the reforms: how do they affect the longterm sustainability of the public finances and intergenerational redistribution.