The Politics Of Parallel Pensions: Lessons From The United Kingdom For The United States

R. Kent Weaver (gscomments@brookings.edu)
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R. Kent Weaver: Center for Retirement Research

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: Opt-out pensions pose many difficult design and implementation issues. The U.K. experience suggests several valuable lessons for U.S. policymakers. First, complex interactions between public and opt-out pensions may create confusion among workers, leading to both discontent and demands for policy change. Second, allowing recurrent opportunities to opt into and out of individual accounts increases administrative complexity, increases choice complexity for workers, and may undermine system legitimacy—but it may also be politically unavoidable. Third, the market may not, unprompted, provide personal pension vehicles that are appropriate retirement savings vehicles for low-earners, especially those who have interrupted earnings records. Fourth, price indexation of wage histories may create pressures for ad hoc policy change. Fifth, increased reliance on means-tested pensions increases administrative complexity and creates perverse incentives for savings and for types of assets held, especially where assets as well as income-tests are involved. Sixth, an option for quasi-privatized pensions leads to pressures to treat those pensions more like fully private pensions with respect to flexibility in withdrawals, inheritability, and ability to borrow against fund balances. Seventh, annuitization costs can add significantly to pension system costs and inequality across cohorts, so the state may want to take on the role of monopoly annuity provider. Eighth, scandals and failures drive policymakers and consumer responses, so it is important to get the policy design right the first time and invest heavily in public understanding of how the reform will work. A final lesson is that scandals, policy tinkering, and uncertainty over pension policy may affect workers’ propensity to opt out of state pensions in unpredictable ways—not just driving people to exit from the state system.

Keywords: pensions; united kingdom; united states; retirement (search for similar items in EconPapers)
Date: 2006-06-12
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