Pensions panic- (12.09.04)

What should a government do if it feels that current earners aren't saving up enough for their own retirement? Should they care at all, trusting people to judge their own preferences for current rather than future consumption? Alternatively could the government introduce some compulsory saving to compensate for individuals reluctance to do so.

For starters, compulsion is unlikely to work. Consumers will simply reduce other savings rather than reducing current consumption as a result. A more likely option is taxation, removing current spending power and reducing government debt leaving the country more able to support future pensioners. However, most people in Britain now opt out of the state earnings related pension scheme and rely on means tested benefits if they are short of money in old age. Although recent reforms have tried to remove the disincentive to save that this creates, they have at the same time complicated the benefits system for pensioners.

Another issue is whether the government should bail out failed private pension schemes. To do so would discourage risk averse behaviour by employers. Tightening the law to prevent this would probably result in trustworthy employers preferring to withdrawing pension schemes rather than putting up with additional regulation and inflexibility in how these schemes are managed. This might ultimately result in a higher burden falling on the taxpayer.

The best answer as with many areas is probably to take a pragmatic approach. Employer's national insurance contributions could vary according to the type and security of pension schemes offered. Similarly employees national insurance contributions could be higher for those who have not got a savings plan that is certified as an appropriate level of provision for the individual. This would ensure that the individuals still had a choice about the degree to which they saved for the future or spent now, but that future reliance on the government was accurately reflected.