BRITAIN: Most Ambitious Retirement Plans Now Proposed

LONDON (International Heral Tribune), May 25, 2006: Britain on Thursday announced far-reaching plans to change its cumbersome state pension system, matching a trend in rich countries toward later retirement as people live longer and fewer young people enter the work force. The proposals, part of a broader European response to a pensions time bomb, were the most ambitious in 60 years. The plans, announced by the pensions secretary, John Hutton, would re-establish a link between increases in pensions and increases in earnings, scrapped by Margaret Thatcher 26 years ago in favor of tying pension increases to the rate of inflation, which is generally lower. It would also introduce a national pensions savings plan into which workers would be automatically enrolled. One crucial caveat was that the cost of indexing pensions to wage increases some time from 2012 onward should be "affordable" - an apparent concession to the chancellor of the Exchequer, Gordon Brown, who initially objected that the proposals were too expensive. Basically, the plan foresees more substantial pensions in return for higher retirement ages. The proposals, contained in what is called a White Paper forming a basis for new laws, foresee the pension age rising to 66 in 2024 and to 68 in 2044. The retirement age is currently 65 for men and 60 for women. In recent years, several European countries, including Austria, Belgium, France and Germany, have formulated proposals to extend working lives to offset demographic challenges. For instance, with its birth rate slowing, Germany plans to increase the retirement age to 67 by 2029. In the United States, the age for receiving full benefits under the Social Security program is being increased to 67. The basic British state pension of £84, or $157, a week is currently among the lowest in Europe as a proportion of average earnings. In addition, pensioners may qualify for means-tested additional amounts. Over all, the value of the state pension has fallen drastically behind earnings since pension increases were linked to consumer price increases by Thatcher. Under the new proposals, the value of the basic pension is expected to double by 2050. "The idea is to make this something that lasts not just for this generation but for generations to come and gives us a chance of having a strong, sustainable, workable, affordable way of people saving for their retirement," Prime Minister Tony Blair declared. The opposition Conservatives raised no immediate major objections. An overhaul of pensions assumed added urgency as stock markets tumbled, some big companies like British Airways and BT Group closed their private pension plans to new entrants and the demographic trend toward aging societies confronted Britons with the threat of a $100 billion gap between tax income available for pensions and the demand for pensions among older people living longer. By 2051, according to the Office for National Statistics, workers will outnumber retirees by only 2.3 to 1, compared with 3.3 to 1 in 2003. That means there will be ever fewer taxpayers fund ing the pay-as-you-go pension plan and ever more pensioners dependent on it. Additionally, the government estimates, some seven million Britons do not save adequately for their retirement. More than three years ago, the government commissioned a report by Adair Turner, an investment banker with Merrill Lynch, which was published late last year. Unlike Turner's proposals, the government plan foresees earlier and more substantial in creases in the pension age, coupled with a delay in relinking pensions and wages. The government proposals said wages and pensions should be indexed some time from 2012 onward - not 2010, as Turner proposed - provided the plan was affordable. Turner told the BBC that a two-year delay was a "reasonable compromise" but a delay to 2015 would "undermine the package." Also in 2012, the government would introduce a National Pensions Saving Scheme, to which employees earning up to around $60,000 a year would con tribute 4 percent of their wages, their employers would add 3 percent and the government would add 1 percent in tax relief. Workers will be enrolled automatically in the savings plan unless they choose to opt out. The government said the new measures would reduce means-testing and would help people caring for children or the disabled to accrue pension rights, increasing the number of women qualifying for a full state pension from 30 percent to 70 percent over the next four years. The current pension is based on a pay-as-you-go plan introduced by the Labour government of Clement Attlee in 1946. As elsewhere, the pensions crisis has provoked sharp political differences, most distinctly between Blair and Brown. But this month, the two men let it be known that they had struck a deal to re-establish the index of pensions increases to wage increases. By postponing the date to 2012, the agreement also put off the question of tax increases until after the next election, to be held by 2010 at the latest. Blair has said he will not run for a fourth term in those elections. While Turner has focused on encouraging white-collar workers to save more by reducing means-testing, Brown promoted a system of means-tested tax credits designed to help the poor. LONDON Britain on Thursday announced far-reaching plans to change its cumbersome state pension system, matching a trend in rich countries toward later retirement as people live longer and fewer young people enter the work force. The proposals, part of a broader European response to a pensions time bomb, were the most ambitious in 60 years. The plans, announced by the pensions secretary, John Hutton, would re- establish a link between increases in pensions and increases in earnings, scrapped by Margaret Thatcher 26 years ago in favor of tying pension increases to the rate of inflation, which is generally lower. It would also introduce a national pensions savings plan into which workers would be automatically enrolled. One crucial caveat was that the cost of indexing pensions to wage increases some time from 2012 onward should be "affordable" - an apparent concession to the chancellor of the Exchequer, Gordon Brown, who initially objected that the proposals were too expensive. Basically, the plan foresees more substantial pensions in return for higher retirement ages. The proposals, contained in what is called a White Paper forming a basis for new laws, foresee the pension age rising to 66 in 2024 and to 68 in 2044. The retirement age is currently 65 for men and 60 for women. In recent years, several European countries, including Austria, Belgium, France and Germany, have formulated proposals to extend working lives to offset demographic challenges. For instance, with its birth rate slowing, Germany plans to increase the retirement age to 67 by 2029. In the United States, the age for receiving full benefits under the Social Security program is being increased to 67. The basic British state pension of £84, or $157, a week is currently among the lowest in Europe as a proportion of average earnings. In addition, pensioners may qualify for means-tested additional amounts. Over all, the value of the state pension has fallen drastically behind earnings since pension increases were linked to consumer price increases by Thatcher. Under the new proposals, the value of the basic pension is expected to double by 2050. "The idea is to make this something that lasts not just for this generation but for generations to come and gives us a chance of having a strong, sustainable, workable, affordable way of people saving for their retirement," Prime Minister Tony Blair declared. The opposition Conservatives raised no immediate major objections. An overhaul of pensions assumed added urgency as stock markets tumbled, some big companies like British Airways and BT Group closed their private pension plans to new entrants and the demographic trend toward aging societies confronted Britons with the threat of a $100 billion gap between tax income available for pensions and the demand for pensions among older people living longer. By 2051, according to the Office for National Statistics, workers will outnumber retirees by only 2.3 to 1, compared with 3.3 to 1 in 2003. That means there will be ever fewer taxpayers fund ing the pay-as-you-go pension plan and ever more pensioners dependent on it. Additionally, the government estimates, some seven million Britons do not save adequately for their retirement. More than three years ago, the government commissioned a report by Adair Turner, an investment banker with Merrill Lynch, which was published late last year. Unlike Turner's proposals, the government plan foresees earlier and more substantial in creases in the pension age, coupled with a delay in relinking pensions and wages. The government proposals said wages and pensions should be indexed some time from 2012 onward - not 2010, as Turner proposed - provided the plan was affordable. Turner told the BBC that a two-year delay was a "reasonable compromise" but a delay to 2015 would "undermine the package." Also in 2012, the government would introduce a National Pensions Saving Scheme, to which employees earning up to around $60,000 a year would con tribute 4 percent of their wages, their employers would add 3 percent and the government would add 1 percent in tax relief. Workers will be enrolled automatically in the savings plan unless they choose to opt out. The government said the new measures would reduce means-testing and would help people caring for children or the disabled to accrue pension rights, increasing the number of women qualifying for a full state pension from 30 percent to 70 percent over the next four years. The current pension is based on a pay-as-you-go plan introduced by the Labour government of Clement Attlee in 1946. As elsewhere, the pensions crisis has provoked sharp political differences, most distinctly between Blair and Brown. But this month, the two men let it be known that they had struck a deal to re-establish the index of pensions increases to wage increases. By postponing the date to 2012, the agreement also put off the question of tax increases until after the next election, to be held by 2010 at the latest. Blair has said he will not run for a fourth term in those elections. While Turner has focused on encouraging white-collar workers to save more by reducing means-testing, Brown promoted a system of means-tested tax credits designed to help the poor. By Alan Cowell The New York Times Copyright © 2006 International Herald Tribune