Contracting-Out and Lifetime Redistribution in the UK State Pension System.

The redistributive potential of state intervention is limited by the ability of individuals to contract-out of public provision. This issue is examined in the context of the UK pension scheme, using evidence for a cohort of men drawn from a sample of over 30,000 simulated individual lifetime earnings profiles using Family Expenditure Survey data. The results show that the ability to contract out affects the dispersion of rates of return on pension contributions and reduces the redistributive impact of the pension benefit-contribution formula. Furthermore, under plausible assumptions, individuals who contract-out receive higher rates of return on their contributions an contracted-in pensioners, and higher returns than they themselves would have received had they remained contracted-in. Copyright 1993 by Blackwell Publishing Ltd