Why contracting out of the state pension should remain

The recently published Green Paper on pensions was widely welcomed. Indeed, it contained some reasonable ideas. However, it also contained a proposal to abolish contracting out of state pensions. This could lead to possibly the biggest tax increase in history as well as the reversal of one of the most important post-war privatisations.

The three reasonable proposals were identical to those in a paper published by the IEA: Sharing the burden – How the older generation should suffer its share of the cuts.

These proposals were:

  1. To move to a position where there is only one state pension.

  2. To retain the contributory principle. There are serious dangers in undermining the contributory principle yet further so this is welcome.

  3. To link the pension age to improvements in life expectancy with the government appointing an independent commission to make recommendations relating to pension age.

This third proposal is important.

Independent commissions should not make political decisions. However, if a political decision is taken to keep the pension age such that the expected time between state pension age and death remains constant, then the technical aspects of that question should be depoliticised. Essentially, we would have a new approach whereby the pension age was adjusted so that the government would pay a pension for a constant expected number of years. This “de-risks” the pension system to quite a degree. It also allows those saving for their retirement to buy bridging annuities between their desired retirement age and the state pension age if they wish.So far, so good…

Read the rest of the article on the ConservativeHome website.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.