Tightropes and Tripwires:New Labour’s Proposals and Means-Testing in OldAge

This paper analyses the proposals contained in the Government GreenPaper, A New Contract for Welfare: Partnership in Pensions for low paidworkers and the potential of the new rules to guarantee a decent incomein old age. It discusses the general principles inherent in the design ofthe British pension system and analyses the balance of these principles isrepresented in the Green paper. The paper then examines how theGovernment’s proposals protect individuals from a means-tested oldage. The paper identifies a number of design faults that could extendmeans-testing to a large number of low paid workers. The paper thenmodels lifetime incomes for a range of hypothetical, low-incomeindividuals and their partners under the Green Paper’s proposals.This paper finds that the Green Paper’s proposals add up toreinventing a new two-stage basic pension. However, two key featuresof such a basic pension package are missing – an ‘adequate’ level ofpayment and comprehensive entitlement. Because of these missingprinciples we argue that the Green Paper’s proposals incorporatetightropes and tripwires for the low paid. The tightrope is an income fromthe basic pension and the secondary pension which is so near the meanstestedminimum that little is gained in retirement from a lifetime ofwork and contribution. Tripwires exist because common life events thatdisrupt basic and secondary pension entitlement are not covered by theGreen Paper’s proposals. These tripwires include periods ofunemployment, sickness or training, extended periods of caring, timebelow the low earnings limit and bereavement.The paper expresses concerns about incentive problems thesustainability of the proposals, the robustness of the assumptions aboutfamily formation and labour market participation and the sensitivity ofthe low paid to fluctuations in the annuity markets. The authors makeseveral suggestions about changes to the proposals that could meet theirconcerns.[...]