Economics Department

Economic Survey - United Kingdom 2004: Some aspects of sustainable development

 

Is the pension system financially sustainable, and does it ensure income adequacy for the retired? 

In the long run, there are also challenges to ensure that economic development is sustainable in both social and environmental terms. Unlike many other OECD countries, the United Kingdom’s public pension system is financially sustainable, as the basic state pension will be uprated by prices not by earnings. Thus, the relative importance of the Basic State Pension will decline over time, partially offset by the contribution from the (earnings related) State Second Pension, which will increase over time. In addition, public provision is being increasingly targeted at poor pensioners. The authorities have set income adequacy on retirement as an important goal in recent reforms. These reforms should ensure that pensioners are guaranteed a basic income, if take up of the increasingly important means-tested benefit, the Pension Credit, is high. The Pension Credit rewards those with savings or income from employment within limits and from age 65, and in this respect is an improvement on the Minimum Income Guarantee. Nevertheless, the operation of the system will introduce disincentives for some individuals to save and work at the margin. The Government believes it is the responsibility of individuals to choose how and how much to save for retirement and whether or not to continue working beyond the age of eligibility. In this light, if income adequacy on retirement remains a problem, the authorities may need to consider raising the level of the basic state pension, although such decisions would have to be made in the light of their effect on public finances. Proposed reforms to toughen the regulatory environment for occupational pensions and simplify the complex pension system are welcome. While further adjustments to the pension system may be necessary, it is important to establish stability in pension system rules and allow time for individuals to digest the implications of the latest wave of reforms.

How could sustainable growth and the climate change strategy be achieved more efficiently? 

Meeting the Kyoto Protocol related target should not present any major difficulties to the United Kingdom, given the wide range of measures included in the climate change strategy. However, the efficiency of the policy package could be improved by ensuring that marginal abatement costs are as uniform as possible across the different policies and measures. Participation in the EU’s emission trading scheme offers an opportunity to reformulate the strategy towards this end. While the proposed EU scheme could usefully build on the strengths of the UK’s already existing emission trading scheme, the UK’s participation in the EU’s emission trading scheme would help to create more targeted abatement incentives, in particular in the emission-intensive power generation sector.

 

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