Save now or retire later is the choice for tomorrow's pensioners

March 25, 2004

Unless today's middle earners either save more or retire later they face the prospect of a poorer old age. Incentives to save more, however, may be reduced by government policies aimed at greater means-testing of state-financed support for pensioners.

These are among the findings of a new analysis of pensions and pensions policy to be presented at an Economic and Social Research Council seminar today. Leading economists from the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies (IFS) will present the latest empirical evidence and microeconomic thinking on the key questions policymakers must address if they are to design a fair and efficient pension system.

Professor Richard Blundell, Director of the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS argues: "In designing a fair and efficient pension system policymakers need to have three important questions in mind. First, is the financial support offered to pensioners by the state in retirement sustainable in terms of the burden it places on the working population? Second, are the mechanisms by which the private financial sector helps people save for retirement sustainable in their apportionment of risk between employers and employees? Third, is the way in which the state and private systems interact sustainable in the sense that the combination promises people a reasonable degree of financial security without creating unduly powerful disincentives for them to work and save?"

"The answers to these questions," Professor Blundell continues, "depend on a multitude of complex factors, ranging from demography to investment returns, and from labour market opportunities to financial literacy. None is easy to resolve, but empirical microeconomic analysis can help shed light on all of them."

Some of the key findings presented at the seminar include:They will face clear incentives to work longer and retire later, but it is less clear whether in aggregate the system will encourage them to save more. If they do not, then the burden may be thrown back on the state.

The researchers also suggest that government should exercise caution in extrapolating future savings or retirement behaviour from the behaviour of those currently approaching retirement age. "It is unwise to draw too many lessons from the outcomes of today's retirees to government policy changes regarding pensions," argues Professor Blundell. "The generosity of the pensions system and the favourable trends in productivity growth and asset markets seen over the last twenty years might mean that the economic pressures enjoyed by today's 'golden generation' have not been extreme enough to offer an accurate guide on how future generations will cope," he concludes.
-end-
For further information, contact: Professor Richard Blundell or Carl Emmerson at the Institute for Fiscal Studies on 020 7291 4800 or email r.blundell@ucl.ac.uk or carl.emmerson@ifs.org.uk

Or Iain Stewart, Lesley Lilley or Becky Gammon at the ESRC on 01793 413032/413119/413122

Economic & Social Research Council

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