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For a topic that could bring about the end of civilization as we know it, it's remarkably hard to find out concrete facts when it comes to pensions.
One reason it's hard is that "pension" is not so easy to define. For example, some money that I have saved is my "pension", but it's not categorized as such by any UK economist.
So, much of what follows is necessarlily accompanied by the caveat "Birks's best guess".
First, how much have people put away, either formally or informally, for their retirement? Paradoxically, the best way to find "funded" pensions is to work from the unfunded sector. If the private sector makes up about half of the GDP in the UK, and if the private sector (best guess estimate here) is about 50% below the public sector in allowing for the amount of money it needs for retirement, then there's about £550bn stuck in various formal and informal pension schemes. Let's not worry about shortfalls within individual company pension schemes, because that's likely the least of our worries.
So, that leaves about a £550bn "shortfall" in provision for our old age amongst current workers. With the government looking to postpone paying pensions to men until the age of 66 (saving about £3bn a year?) this effectively means that the working population are going to have to provide £550bn divided by the average number of years of retirement (because the money won't be paid as a lump sum). And the sum left over will give us the extra years that people should work to bring things back into balance. Looked at more simply, it seems to me that people will need to produce about £20,000 each extra (i.e., above what they are spending from day to day) to bring the private sector back into balance. Even given an optimistic analysis of people saving £4,000 a year, that seems to indicate to me that the average retirement age needs to be five years higher to get the private sector back in sync.
That, of course, is as nothing to the liabilities in the public sector, where talk of a shortfall is nonsense because it's all shortfall. The unfunded pensions liability is about £1,120bn, which at the moment means that every working person will have to pay about £40,000 of their wages to keep the unfunded pension system going. That's 85% of GDP, by the way.
In a way this paints too rosy a picture. Oh, the innocent might say, well, 85% of GDP isn't too bad a number. But, well, it is, especially when it's getting worse every year. Because just look at the percentage of GDP that you can't in any way save. Notwithstanding the multiplier effect (which makes things even worse) you can't shut down hospitals, the police force, the schools, or not eat. Just looking at the current government's pathetic attempts to balance the books shows how hard it is even to shave 1% off a deficit, let alone 85%. In other words, getting the unfunded pensions sector back into self-funding balance is plain impossible. Much though I would like it to be done, it can't be done. The best that can be hoped for is to stop the deficit getting worse as a percentage of GDP.
Every government's answer to that is, inevitably "let's grow GDP then!" But that's no long-term answer, particularly since, historically, increasing GDP hasn't actually seen any success in getting the pensions deficit back into any kind of balance.
In this sense, the "we must increase the pension age" argument is the right one -- and not just the state pension age. It needs to be done across the board, and more severely than is being proposed at the moment. The one good thing about the recent conference season is that some people, at last, seem to be realizing this, and that the "it's not fair" argument (we don't have high-paid jobs, we've contributed to the (public authority) funds all our working lives, we were promised this when we started and thus it's our right) don't hold water. The answers are simple:
1) Everything one pension person gains is taken from someone else's pocket, probably equally hard-up.
2) Any promises made in the past were unintentional lies, because they were unfulfillable.
3) If we carry on as we are, the entire political system will disintegrate (a la Russia in 1990s) and all pensioners will end up with nothing. That, at least, has the merits of treating all old people equally.
There's obviously a balance that needs to be struck here, and the major argument is, in effect "other people should take more of the bad medicine and I shouldn't take any". In Russia in the 1990s it was basically only the old (the savers) who suffered. The still-producing classes benefited greatly. In the UK at the moment it's the old (the already retired) who are benefiting, at the expense of the still-producing classes.
Provided you have a relatively stable society, there's quite a gap in the middle, where you can set down a "policy", and the collapse of society does not result. One side could favour the still-producing, while the other could favour the already-retired. There'd be a bit of grumbling, but we'd carry on. Provided the issue is not, once again, "swept under the carpet", a solution can be found.
But the longer you deny that there is any problem (or, rather, admit that there is a problem, but fail to do anything about it), then the narrower that "solution" gap becomes, because the solution becomes that much harder to bear. Eventually it gets to the stage (and we might already be there) where any solution that would work would result in the disintegration of the system. And once you reach that point, it's just too late.
One reason it's hard is that "pension" is not so easy to define. For example, some money that I have saved is my "pension", but it's not categorized as such by any UK economist.
So, much of what follows is necessarlily accompanied by the caveat "Birks's best guess".
First, how much have people put away, either formally or informally, for their retirement? Paradoxically, the best way to find "funded" pensions is to work from the unfunded sector. If the private sector makes up about half of the GDP in the UK, and if the private sector (best guess estimate here) is about 50% below the public sector in allowing for the amount of money it needs for retirement, then there's about £550bn stuck in various formal and informal pension schemes. Let's not worry about shortfalls within individual company pension schemes, because that's likely the least of our worries.
So, that leaves about a £550bn "shortfall" in provision for our old age amongst current workers. With the government looking to postpone paying pensions to men until the age of 66 (saving about £3bn a year?) this effectively means that the working population are going to have to provide £550bn divided by the average number of years of retirement (because the money won't be paid as a lump sum). And the sum left over will give us the extra years that people should work to bring things back into balance. Looked at more simply, it seems to me that people will need to produce about £20,000 each extra (i.e., above what they are spending from day to day) to bring the private sector back into balance. Even given an optimistic analysis of people saving £4,000 a year, that seems to indicate to me that the average retirement age needs to be five years higher to get the private sector back in sync.
That, of course, is as nothing to the liabilities in the public sector, where talk of a shortfall is nonsense because it's all shortfall. The unfunded pensions liability is about £1,120bn, which at the moment means that every working person will have to pay about £40,000 of their wages to keep the unfunded pension system going. That's 85% of GDP, by the way.
In a way this paints too rosy a picture. Oh, the innocent might say, well, 85% of GDP isn't too bad a number. But, well, it is, especially when it's getting worse every year. Because just look at the percentage of GDP that you can't in any way save. Notwithstanding the multiplier effect (which makes things even worse) you can't shut down hospitals, the police force, the schools, or not eat. Just looking at the current government's pathetic attempts to balance the books shows how hard it is even to shave 1% off a deficit, let alone 85%. In other words, getting the unfunded pensions sector back into self-funding balance is plain impossible. Much though I would like it to be done, it can't be done. The best that can be hoped for is to stop the deficit getting worse as a percentage of GDP.
Every government's answer to that is, inevitably "let's grow GDP then!" But that's no long-term answer, particularly since, historically, increasing GDP hasn't actually seen any success in getting the pensions deficit back into any kind of balance.
In this sense, the "we must increase the pension age" argument is the right one -- and not just the state pension age. It needs to be done across the board, and more severely than is being proposed at the moment. The one good thing about the recent conference season is that some people, at last, seem to be realizing this, and that the "it's not fair" argument (we don't have high-paid jobs, we've contributed to the (public authority) funds all our working lives, we were promised this when we started and thus it's our right) don't hold water. The answers are simple:
1) Everything one pension person gains is taken from someone else's pocket, probably equally hard-up.
2) Any promises made in the past were unintentional lies, because they were unfulfillable.
3) If we carry on as we are, the entire political system will disintegrate (a la Russia in 1990s) and all pensioners will end up with nothing. That, at least, has the merits of treating all old people equally.
There's obviously a balance that needs to be struck here, and the major argument is, in effect "other people should take more of the bad medicine and I shouldn't take any". In Russia in the 1990s it was basically only the old (the savers) who suffered. The still-producing classes benefited greatly. In the UK at the moment it's the old (the already retired) who are benefiting, at the expense of the still-producing classes.
Provided you have a relatively stable society, there's quite a gap in the middle, where you can set down a "policy", and the collapse of society does not result. One side could favour the still-producing, while the other could favour the already-retired. There'd be a bit of grumbling, but we'd carry on. Provided the issue is not, once again, "swept under the carpet", a solution can be found.
But the longer you deny that there is any problem (or, rather, admit that there is a problem, but fail to do anything about it), then the narrower that "solution" gap becomes, because the solution becomes that much harder to bear. Eventually it gets to the stage (and we might already be there) where any solution that would work would result in the disintegration of the system. And once you reach that point, it's just too late.
