Edward Elgar, 1998, xv + 239 pp, hbk 1 858 988020, £68
The Pensions Commission has come and gone, and Adair Turner has wondered publicly whether he ought to have been more radical by recommending a higher basic state pension in order to keep more pensioners out of means-testing. This book might have been published ten years ago, but we are reviewing it in this edition because it is even more relevant now than it was then. It is a careful study of economic models and their application to the problem of funding pensions for an ageing population, and the lesson we draw from it is that Turner should indeed have been much more radical. The answer to the problem is not a larger contributory state pension but a universal pension.
Chapter 1 is an introduction and outline and discusses the context: reducing birthrate and increasing longevity, leading to more elderly people dependent on fewer younger people. Chapter 2 employs economic models to explore population growth, age structure, and social expenditure; chapter 3 uses Australia as an example to discuss the effects on projections of assumptions about real spending growth, productivity growth, unemployment, and labour market participation rates; and chapter 4 shows how immigration growth reduces considerably the proportion of elderly people in the population.
In chapter 5 Creedy begins his discussion of pensions and their financing by studying the variety of options available to governments; chapter 6 compares private savings and social transfers using a complex model which takes account of increasing longevity and changes in labour supply; chapter 7 studies state schemes and the ability to contract out of them; and chapter 8 finds that an earnings-related component creates positive employment incentives and raises average earnings compared to a flat-rate pension, but also that a flat-rate pension scheme can achieve higher social utility curves. Chapter 9 studies the wage-pension trade-off under a variety of pension schemes and discovers a rather complex picture; and chapter 10 begins the author’s discussion of lifetime simulation models and finds that means-tested and universal systems result in similar lifetime inequalities, which means that removing the complexity of means-testing would not create greater inequality. Chapter 11 shows that means-tested state pension systems are a relative disincentive to private pension saving and that a universal scheme would make less optimal the kind of working age behaviour which results in lower retirement incomes. Similarly, chapter 12 finds that a universal pension would make optimal a higher retirement age than does a means-tested pension.
The author’s careful use of relatively simple economic models builds a strong case for a universal pension. Given the importance of pensions in relation to social welfare, employment incentives, savings incentives, tax rates, and much else, it really is essential that the work of the Pensions Commission continues, and equally essential that this book is on its members’ reading list.