NCPA - National Center for Policy Analysis

A Major Overhaul Of British Pensions

March 18, 1997

Facing tough odds against being reelected, Britain's Conservative Prime Minister John Major has made a bold proposal: privatize pensions.

  • The first part of the present two-tier system guarantees a flat benefit to all retirees, equal to about 15 percent of average male earnings -- which, by some estimates, would fall to only 8 percent by 2030.
  • The second tier pays an amount related to past earnings -- which British workers can opt out of, as three out of four have done.
  • In lieu of participating in the second tier, they can choose an employer-provided pension plan or make deposits to an Individual Retirement Account type of scheme.
  • Upon retirement, workers have to buy an annuity which provides a basic income for the rest of their lives.

Here is what the P.M. proposes:

  • To replace the first tier, all new workers would open a pension account with an approved fund manager or insurance firm -- paid for by a rebate of the payroll taxes that now fund the basic state pension.
  • To replace the second tier, workers would get another rebate equal to about 5 percent of the earnings now subject to tax for the current system, which they would also invest -- and have option of adding to it.
  • The state would continue to guarantee a basic pension benefit equal to the value of the first tier to those whose private pension fell short of the real value of today's first-tier benefit.

While taxes would initially go up by about $11 billion a year, in the long run government spending would be cut by a real $65 billion a year.

Analysts say Britain's 1978 decision to allow employees to opt out of the employer-provided second tier has resulted in a drastic cut of the government's unfunded liabilities.

Source: Perspective, "Desperate Politics, Bold Ideas," Investor's Business Daily, March 18, 1997.


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