The public pension system in the United Kingdom differs significantly from its peers in continental Europe. First, private and occupational pensions play a much larger role in retirement than in the rest of Europe. Secondly, UK projects that public pension savings will actually decrease as a percentage of GDP (from 4.5% in 2000 to 4.1% in 2050) despite an aging population. This is due to a decrease in benefit generosity and a push for more individuals to self-insure for retirement.
Pensions are financed through an 23.8% payroll tax on weekly earnings between £89 and £591 (11% paid by the employee, 12.8% paid by the employer). In 1968, 80% of males between the ages of 60 and 64 were in the labor force, but now this has dropped by 1996 to just under 40%.
First Tier: The Basic State Pension
This is a flat-rate contributory benefit payable to men over 65 and women over 60 (gradually increasing to 65 for women by 2020). To qualify for the £73 weekly benefit, individuals must pay into the system for 90% of their working life. There is no mean-testing for this program, and delaying the receipt of benefits by one year will increase weekly payments by 10%.
Second Tier: SERPS, Occupational and Personal Pensions
The State Earnings Related Pension Scheme (SERPS) was introduced in 1978 and pays a pension equal to a fraction of an individuals qualifying annual earnings each year since 1978. Originally it aimed to replace 25% of an individual’s best twenty years’ earnings (up to a limit), but subsequent cuts have move the replacement rate to 20%.
Individuals can elect to opt out of the SERPS program and instead participate in private pensions (an individual retirement account) or an occupational pension. Occupational pensions currently cover 45% of all workers. Since 1988, individuals could also leave SERPS and their occupational pension in favor of a private savings scheme. By the mid-1990s one-quarter of all employees had taken out a personal pension. Blundell, Meghir and Smith note that “there is a serious issue over the number of older workers who were ‘mis-sold’ personal pensions by financial advisers who wrongly advised them that they would be better off leaving their occupational pension scheme.” It is not surprising that 22% private-sector occupational schemes plans are defined contribution (or a defined benefit/defined contribution hybrid) as compared to only 2% in the occupational schemes in the public sector.
The state also has a Minimum Income Guarantee program. This is a flat-rate, noncontributory, means tested program to help those with little income. All individuals aged 60 and older who are unemployed receive the Minimum Income Guarantee. The incapacity benefit is for disabled individuals. One must undergo a medical examination by a general practitioner (GP) and be certified unable to do any work to receive this benefit.