Pension and Participation Rates

 

Pensions

Explained in one of my pages on demographics, was the case of an ageing population in developed countries. Today, people are living much longer than in previous years. We are living to ages almost double what they were 100+ years ago.

This means there is a growing strain on the government to pay pensions. Governments may be forced to make changes to state pensions as the pension bill grows with life expectancy.

 

How can governments approach this problem?

 

1. Make changes to the state pension age – therefore, you need to be older to claim your pension as you are expected to live longer. The state pension age in the UK will rise to 66 by 2020, and a rise has been forecasted again in the future.

2. Increasing contributions to qualify for state pension – state pensions are funded by National Insurance (NI) contributions. You need to have paid NI for a minimum number of years before you are applicable to claim. This minimum number of years could increase to help fund pension in the future.

3. Decreasing pension amounts – the government can cut down on what it gives people as a state pension. This would leave people to financially plan for the future themselves, perhaps getting their own private pension plans. The government has recently made it compulsory for employers to enrol workers on a workplace pension, to ensure people are automatically paying some money in to prepare themselves for old age. [workers can voluntarily opt-out of a workplace pension scheme]

 

Changes to UK Pension Legislation in 2015

Approx 18 million people aged 55 and over have been given more flexibility in how they can use/withdraw from their private pensions.

People now have the option to withdraw their entire pension and spend/invest it as they like. Before, people used to have to accept a regular payment e.g. monthly or annually.

+ This has increased choice for people paying into private pension schemes. This could increase spending, which is good for the economy.

- However, more people could choose to withdraw more money in the short-term and not plan effectively for the long-term. This could potentially restrict future growth.

- It could also mean people rely more on state care in the future if money from private pensions run out.


Participation Rates

The participation rate is the percentage of the population that are willing and able to work.

There are a some laws that can be changed to improve participation rates.

 

1. Changes to pensions – increasing state pension age may increase size of the workforce and participation rate. By 2046, the state pension age should rise to 68.

2. Work incentives – minimum wages, working tax credits and employment allowance can make firms want to hire people and workers want to work.

3. Education laws - e.g. since 2015, people in the UK must stay in some form of education until they’re 18 years of age. Over the long-term, it will lead to a workforce with higher skills and education levels. This increases labour flexibility and productivity.

4. Welfare reforms – e.g. increasing childcare subsidies [to help parents pay for childcare] to incentivise more people to go to work [women in particular - please read more below for more details about this]

Some families are faced with the problem of paying somebody to look after their children while they’re at work. It may be less profitable for you to go to work and instead stay at home, look after your children and claim benefits.

For example, if you work for minimum wage, you probably earn around £1200 per month, if you work 35 hours per week (before tax). Taking out the tax, you’ll be left with approx. £1100. If your monthly childcare bill comes to £500, then you’ll be left with £600. Parents who stay at home and look after children could probably find a way to earn more than £600 per month in benefits alone.


In summary, we have learned:

  1. Changes need to be made to pensions so they continue to be funded by the state

  2. Laws have changed for private pensions

  3. Participation rates can be improved through government intervention


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