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Rethinking the Welfare State

The Political Economy of Pension Reform

Edited by Martin Rein and Winfried Schmähl

In this book a distinguished group of contributors discuss the changing political economy of pension reform. They focus on those countries which have launched a significant reframing of their pension system. Each chapter provides a detailed review of recent pension reforms and offers institutional evidence of the extent to which these reforms suggest a redirection of the welfare state towards a more public-private mix of policies. The countries were selected to represent the variety of new directions which mature industrial countries as well as countries in transition have taken.
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Chapter 1: Contracting Out of the State Pension System: The British Experience of Carrots and Sticks

David Blake


David Blake INTRODUCTION The United Kingdom was one of the first countries in the world to develop formal private pension arrangements (beginning in the nineteenth century). First-pillar state pension provision began in the early twentieth century and the modern welfare state began in 1948. The UK operates its welfare state on the Beveridgean principle of providing just a minimum safety net, in contrast with the more generous Bismarckian principle that operates on the Continent. Second-pillar state pensions began in 1961 and the current second-pillar state pension scheme (S2P – the State Second Pension Scheme) began in April 2002. From the very beginning, individuals were offered a carrot in the form of very generous tax incentives to ‘contract out’ of the second-pillar state pension scheme into either occupational pension schemes or personal pension schemes. However, since 1980, a stick has also been in use: the UK became one of the first countries in the world to begin the process of reducing systematically unfunded state provision, thereby providing a different type of incentive to make private pension arrangements. This explains why the UK is one of the few countries in Europe whose pension problem is manageable. The reasons for this are straightforward: state pensions (both in terms of the replacement ratio and as a proportion of average earnings) are amongst the lowest in Europe, the UK has a longstanding funded private pension sector, its population is aging less rapidly than elsewhere in Europe and its governments have taken measures to prevent...

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