Saving the day

Από τον Economist

BRITAIN'S state-pension system is known to be tight-fisted. Just how stingy it is emerges from a report this week from the OECD: the promise made to today's young workers is the least generous in the developed world.

Monika Queisser and Edward Whitehouse, the report's authors, estimate what those who are young today will get from the state and compulsory private-pension schemes when they hang up their boots in 2050 or thereabouts. Average earners in Britain can expect a pension worth just 31% of what they are earning before they retire, compared with 41% in America, 68% in Italy and 96% in Greece. The average across all 30 OECD countries is 59% (see chart).

This is an inter-generational game where neither a low nor a top score is cause to celebrate. Greece's pension promise is too good to be true, since it would impose an unbearable burden on future taxpayers. Britain's may look affordable but it is politically unsustainable, since it would consign future pensioners to an unacceptably low standard of living if they were to rely upon the state.

The report underlines why reforms now going through Britain's Parliament are essential. The age when people become eligible to receive state pensions will rise from 65 in the early 2020s to 68 by the mid-2040s. And the basic state pension will be re-linked in 2012 to earnings, which increase faster than prices. The OECD's calculations assume the second reform is already in place, but not the first.

Another change is also vital if young workers are to look forward to a decent retirement, for many of the corporate final-salary pension schemes, which did much to make up for the inadequacies of the state system, are now closed to new members. The government wants to introduce, also in 2012, a new system of personal retirement-saving accounts.

The idea is to enrol in these new accounts most employees who are not already members of a pension plan in which the employer contributes at least 3% of a worker's pay. Around 10m people, mainly low-to-moderate earners, are likely to fall into this category. Although they will be enrolled automatically, they are free to leave the scheme if they choose. Employers will contribute 3% of a worker's eligible earnings (now £5,000-£35,000) and employees 4%. Tax relief will add another 1%, making a total contribution rate of 8%. The government put its proposals out for consultation in December and is due to respond to comments next week.

The OECD's calculations suggest that the new accounts could do the trick. With a total contribution rate of 7% on all pay, an average earner's pension would rise from 31% of pre-retirement pay to the OECD mean of 59%. But this encouraging finding assumes that workers contribute throughout their 45-year careers. If they started ten years later—at 30 rather than 20—they would need to save nearly 10% of their pay. The government's own forecasts, which take likely interruptions into account by assuming continuous saving from age 30, suggest that the new accounts will give median earners a pension worth around 45% of their pay before retirement.

Britain, with New Zealand, is breaking new ground in introducing a retirement-saving plan using the device of automatic enrolment. The reform dodges the thorn of compulsion by nudging people towards the desired course of action. The OECD research suggests that there will have to be a lot of successful nudging, however, if young workers are to have a hope of securing a reasonable pension.

Το άρθρο δημοσιεύτηκε στο περιοδικό Economist στις 7 Ιουνίου 2007.