Pensions and labour-market participation in the United Kingdom

Abstract

Unlike most other European countries the United Kingdom's pension system is not well described by an analysis of the social-security element. For 30 years or more, around half the workforce has been covered by private occupational pensions. Something like half of the income of pensioners comes from non-socialsecurity sources, and this proportion is growing. Of the workforce in the mid-1990's, 75 percent are contracted out of the secondtier State Earnings Related Pension Scheme (SERPS) into private occupational or personal pensions.' Partly as a result of these facts the United Kingdom also differs from many other countries in one other important respect: its state pension system is solvent. Tax rates necessary to pay for it are not predicted to rise despite the fact that the number of people over state retirement age is predicted to rise from 15.7 percent of the whole population to over 24 percent in 2050.2 In this paper we begin by describing the labor-market behavior of individuals around pension age. We also consider the coverage of the various parts of the social-security system. We go on to explain the structure of state pensions in the United Kingdom and compute the incentives for retirement that the structure creates, focusing on early retirement and the role of disability benefits, which are especially relevant for lower-skilled workers. We compare these incentives with those facing workers with private occupational schemes who now make up the mnajority of older workers close to retirement. The structure of incentives is found to match well with the observed patterns of labor-market participation in the data. L. The Labor-Market Behavior of Older Persons in the United Kingdom The labor-market behavior of older persons in the United Kingdom has been characterized by a severe fall in the participation of men. The rate of participation among recent cohorts falls sharply below 80 percent after the age of 50 and declines rapidly thereafter. In contrast the secular rise in the participation of women has resulted in a small upward trend in participation among women in the 55-60 age bracket, with participation rates approaching those for men

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