Comments: No easy answers as the pensions battle hots up

I assume Tim Congdon's comments were in the course of debate rather than a genuine belief that there isn't a savings problem?

Having observed at first hand (as a pension scheme trustee) the mistakes of the last decade or so, ranging from excessive fund management charges, wholly optimistic actuarial assumptions, to Browns smash and grab, and more recently the move from equities to bonds at just the wrong time, I have observed a herd mentality (which I have also been sucked into) of riding the reverse roller coaster. Or put another way - equities crash so move into bonds, and house prices increase so property SIPPS become exciting - you know what I mean. Adairs forthcoming attempt to break the cycle and get some sensible thinking going is looking as you say like creating more questions than answers.

Savings are not enjoying a good press, and pensions in particular are viewed by a new generation as 'dodgy'. At ths same time we see property viewed as a one way bet, and a lack of understanding that in a low inflation economy debt will not erode but has to be repaid.

So what happens if we don't get to grips with saving, and the demographic time bomb explodes in our lifetimes? That is an interesing area for speculation, because then there really will be a new paradigm......some suggestions...

1) Inherited wealth will erode as it is needed to supplement retirement income. Equity release and similar schemes will become ever more innovative and competetive.

2) Renting will become the norm - the old model of buy, work to pay off the mortgage, and die leaving the house to the family will become redundant to many.

3) Where buying does take place lifetime mortgages will become more common instead of the current model (mortgage, pay it off over 25 years, and then take out a new MEW).

4) A new jobs market will open up for the over 50's (and increasingly over 60's) for those who are too burnt out to carry on with their current job but still need to work (at least part time) - a la B&Q.

5) The wealthy (ie those who save or have saved) will become wealthier and those with debt will find it ever harder to break the debt cycle.

Mere speculation. We live in interesting times!

Posted by David Brown at November 27, 2005 06:04 PM

Iím with Gordon Brown on this one. The first priority is to spend any money available to keep the worst off above the poverty line. If that means the best off receive no state pension then so be it.

Prioritising certainly makes more sense than giving everyone exactly the same state pension and then trying to tax the rich and provide extra allowances for the poor.

What Iím suggesting is of course Ďmeans testingí. This is an emotive phrase because such a system was used during the 1930s depression. It was considered a humiliating system and the phase causes fear among todayís retirees.

But baby boomers do not remember the 1930s. And those in work today already live with a humiliating means test Ė itís called the income tax system.

Anyone familiar with completing an income tax form to decide what they pay the state every year shouldnít have a problem completing a Ďmeans testí form to decide what they get from the state every year when they retire.

Now the rich will object to getting nothing. Well, tough Ė they should look on the state pension as an insurance policy, not a savings scheme. Itís what we mean by National Insurance.

How about the age of retirement? There are lots of people on invalidity benefit now that are effectively retired. These people could either decide to seek work and fulfil obligations to try to obtain work or decide to retire - at any age. The only difference is that their state pension income would be less than their unemployment benefit income.

The Ďage of retirementí is just the upper age the government decides it will stop paying unemployment benefit and starts paying the lower pension benefit, if applicable. Anyone could retire when they like Ė itís just that their pension benefit would be less than benefits they would get if they were really prepared to work.

The only tricky bit is: What do we mean by ďmeansĒ? It should really be wealth, not income. Thereís no excuse for a widow owning a million pound house complaining about having no income. But if people want a pension from the state they should be prepared to declare their wealth to the Revenue just is they declare their income for tax purposes.

Posted by Sandid at November 28, 2005 11:40 AM


Posted by sfdgjh at December 1, 2005 12:55 AM

Or, from the Chinese:

Bearing heater
oil filter machine

Hmmm, deep.

Posted by Sandid at December 1, 2005 11:42 AM

The key to what Sandid says lies in his second sentence. It's easy to say that the "worst off" should be kept above the poverty line, but we also need to ask how the "worst off" got that way. Sure, some of them will have been on low wages all their lives. Others however will have earned good money but have been profligate and have no savings to live on. Trouble is, if the state is always going to provide an adequate pension to the retired there is no incentive for people to save during their working lives. How fair is it for means-testing to put someone thrifty in the same position post-retirement as someone who's p&*%$£d it up the wall (I speak as a person more likely to fall into the latter category)? Surely the fairest thing would be for the state to provide a fixed pension linked to earnings at a modest but survivable level. If we want to be more affluent during our retirement it's then up to us to put money aside while we're young enough to work.

Posted by bears all at December 2, 2005 09:35 AM

I wasnít suggesting that the state pension should provide any more than a dignified existence for those entirely dependent on the state. In twenty years time there will be so many people of retirement age that even that low level of state pension will be difficult to maintain.

But I think it will be wrong, in twenty years time, to give any state pension at all to people that doesnít need it. By only supporting the really needy the burden will be less for those still in work. Yes, it really should be up to people to accumulate enough wealth to last until they die without needing a state pension.

But Iím speaking as a baby boomer. Pensioners today see things differently. Someone aged 70 today was born in the depression, just before the Jarrow march, had they childhood dominated by the war and went to work and raised a family at a time of rationing. The pre-war generation see a state pension for everyone as an absolute, essential right. They think todayís rich pensioners should still get the state pension simply because theyíve earned it Ė even though there could be more money for poor pensioners if rich ones didnít get it. They supported the previous generation in retirement and they expect to be supported now. They donít want a means test because they want the dignity of equal treatment.

People that are 50 today, the baby boomer generation, donít see things the same way. As a boomer, I donít agree with the pre-war generationís view but Iím happy to go along with what they want because they deserve it and we can afford it. In fact Iím happy to give them a bigger state pension, just not one linked to wage inflation Ė better to raise the amount once and keep the link to price inflation.

But the last thing we want to do is give baby boomers the idea that their state pension will be the same as that for the pre-war generation. Itís not just better that we donít depend on the state; itís essential because of the numbers of pensioners and taxpayers involved.

Fortunately, I think boomers do understand that. We also donít expect employers to arrange our private pensions in the way the pre-war generation did. The sooner we remove any link between employment and pension provision the better. There should be a tax concession for pension saving; then itís up to the individual to do the rest.

As for people that wonít save and will p*ss it up the wall Ė thatís not boomer behaviour, itís more likely to be someone from Generation-X, the 30-somethings of today. Boomers know very well that we canít depend on Generation-X to do anything for us or, indeed, themselves. Thatís another reason to get things sorted before we retire.

Posted by Sandid at December 3, 2005 04:12 AM