In 1985 the UK government issued a Green Paper on The Future of Social Security which proposed the abolition of the State Earnings-Related Pension Scheme (SERPS). At a lunchtime meeting organized by the Centre on 9 December, Paul Johnson described the subsequent debate over SERPS as misguided and irrelevant to the real economic issues which underlie the financing of old age. There was no evidence that increases in pension provision by the state had reduced private incentives to save for old age. The financial circumstances of the elderly have not changed in recent years, and most elderly people will not be able to rely on their own savings to support themselves. Pensions and the cost of supporting an ageing population will therefore remain an important economic policy issue.

Paul Johnson is a Lecturer in Economic History at the London School of Economics and Political Science and a Research Fellow in the Centre's 'Human Resources Since 1900' research programme. He has written on old-age pensions and working-class saving in Saving and Spending: The Working Class Economy in Britain 1870- 1939, recently published by Oxford University Press. The views expressed at the lunchtime meeting are his own and not those of CEPR, which takes no institutional policy positions.

Johnson began his talk by noting that the arguments raised by the present government concerning state pensions were not new: they were all developed in the late nineteenth century when the issue of state old-age pensions was first discussed. For more than eighty years the balance of argument favoured increased state support for the elderly, but the present government believes that the balance has now altered. Is this because objective economic and social conditions have changed? No, according to Johnson; although absolute standards of living are much higher today than in 1908, when old age pensions were first introduced, the problem of poverty among the elderly persists. Over four million of the country's nine million pensioners depend on some form of means- tested state benefit, and government transfers are the major source of income for more than four out of five people of pensionable age. Johnson maintained that the most simple, efficient and direct way to improve the economic conditions of the elderly is the same today as that advocated eighty years ago, namely the extension of state benefits. This is what SERPS was designed to do.

Johnson argued that the government had proposed changes to SERPS not because it believed the problem of old-age poverty has now been solved, but because other objectives now had a higher priority on the political agenda. The proposed changes to SERPS, however, were likely to hinder rather than promote these new aims, which included 'rolling back the frontiers of the state', restoring economic incentives and reducing public expenditure. Would tinkering with SERPS and encouraging private savings help to achieve these objectives? This seemed unlikely to Johnson. The basic state retirement pension will continue to play an essential role in the financing of old age. Therefore the same political pressure for pension increases that governments faced from 1908 to the introduction of SERPS in 1975 would still exist in the future, even if SERPS were abolished or its scope reduced. Furthermore, if more occupational pensions were managed by pension funds and insurance companies, the pressure would grow for increased political control over these institutions. Private pension provision operates within a complicated framework of legislative conditions and tax concessions. Interference by a future government less committed to private pensions would therefore be predictable.

Will private incentives, especially the motivation for self-help and independence, be restored by curtailment of SERPS and the encouragement of private pension provision? There was no evidence, according to Johnson, that state pension provision had ever reduced these incentives. Private saving for old age, he noted, has increased as state provision has expanded. Nevertheless many individuals are unable to save for old age because of low pay and recurrent spells of unemployment; they must therefore depend on the basic state pension and means-tested benefits.

Will increased 'privatization' of the pensions system reduce the future cost of an ageing population? It could only do this, said Johnson, by reducing the welfare of future generations of pensioners. Retired people are supported from the output of the working population, and the level of support which can be sustained depends in part on the size and productivity of the labour force. Whether the elderly acquire their purchasing power through tax-funded transfers (i.e. state pensions) or interest payments (i.e. private or occupational pensions) has no direct effect on the level of national output. Modifications to SERPS may shift the cost of supporting the elderly from one section of the national accounts to another, but they will not change the amount of food and clothing the elderly require or the economy's ability to provide these. In fact, measures which promote private pensions will be costly, since the management expenses of personal portable pensions have been estimated to be up to ten times greater than those for SERPS.

Johnson concluded that tinkering with SERPS cannot bring about the fundamental political, moral and economic changes which the Green Paper suggests are the government's objectives. Such changes would require a radical reappraisal of the role of the basic state pension, the status of the National Insurance system, and the integration of the tax and benefit systems. But this, thought Johnson, was likely to offend too many voters to be politically feasible.

The discussion which followed was lively. Johnson had noted that the ratio of pensions to wages had not changed since the time of the Poor Laws. This interpretation was challenged: the appropriate comparison must take account of the tax system, and the ratio of pensions to disposable incomes had increased steadily during this century. Johnson agreed, but argued that economic disparities among the elderly had increased over time. The relationship between SERPS and occupational pension schemes was also questioned. One member of the audience argued that SERPS serves in many ways to supplement occupational schemes; another commented that those in occupational schemes now had the best deal, and that the abolition of SERPS could only injure the less well off.