Abstract

Pay-as-you-go state pension schemes such as that operated in the United Kingdom face growing pressures from the rising old-age dependency ratio and improvements to life expectancies. Alongside compulsory increases in the statutory retirement age, governments have used incentives to encourage workers to postpone voluntarily their exit from employment, deferring their Basic State Pension in exchange for the additional financial reward of an enhanced pension at a later point in time. The impact of pension deferral upon the sustainability of the state pension system is dependent on the interplay of short-term savings from payment delay and increased subsequent longer-term payments to pension recipients. This article presents a model that simulates the financial effect of deferral uptake on the National Insurance Fund over a 40-year projection under alternative scenarios, including current and revised post-2016 deferral incentives. The findings indicate that the recent change in enhancement rate from 10.4 per cent to 5.8 per cent will significantly impact on state pension sustainability while still providing an incentive to defer. We estimate that any reduction below 4 per cent would result in zero uptake of the deferral option, based on a rational financial choice.

DOI

10.1080/00036846.2017.1397850

Publication Date

2017-11-06

Publication Title

Applied Economics

Volume

50

Issue

21

First Page

2356

Last Page

2368

ISSN

0003-6846

Embargo Period

2019-05-06

Organisational Unit

Plymouth Business School

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