Why contracting out of the state pension should remain

Prof Philip Booth writes for ConservativeHome

The recently published Green Paper on pensions was widely welcomed. Indeed, it contained some reasonable ideas. However, it also contained a proposal to abolish contracting out of state pensions. This could lead to possibly the biggest tax increase in history as well as the reversal of one of the most important post-war privatisations.

The three reasonable proposals were identical to those in a paper published by the IEA: Sharing the burden - How the older generation should suffer its share of the cuts.

These proposals were:

  1. To move to a position where there is only one state pension.
  2. To retain the contributory principle. There are serious dangers in undermining the contributory principle yet further so this is welcome.
  3. To link the pension age to improvements in life expectancy with the government appointing an independent commission to make recommendations relating to pension age.

This third proposal is important.

Independent commissions should not make political decisions. However, if a political decision is taken to keep the pension age such that the expected time between state pension age and death remains constant, then the technical aspects of that question should be depoliticised. Essentially, we would have a new approach whereby the pension age was adjusted so that the government would pay a pension for a constant expected number of years. This "de-risks" the pension system to quite a degree. It also allows those saving for their retirement to buy bridging annuities between their desired retirement age and the state pension age if they wish.

So far, so good…

Read the rest of the article on the ConservativeHome website.

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