Saturday, 18 October 2008

What ever happened to those pensions?

In about ten years time, the UK population will look something like this; out of every ten people, two people will be over 65, two will be under 18, leaving six people of working age.

If the present benefits system is any guide, at least one person will be receiving some kind of state benefit, while another will be a homemaker. That leaves just four people that actually get out of the house and receives a salary.

However, at least one out of four workers will be on the government payroll. Simply put, in about ten year’s time, three private sector workers will be sustaining the remaining seven.

The UK is ageing rapidly, that would be serious enough problem. However, today's 50-somethings haven't been too quick to put anything aside for those twilight years. In the contrary, they have been spending and building up a huge pile of personal debt.

Why have today's middle aged workers been so reckless? I'll give you three reasons; the stock market, the housing bubble and the government. People close to retirement have put too much faith in asset markets and the likelihood of a viable state pension system.

Over the last thirty years. Today's workers were hit by two successive asset bubbles that discouraged savings and encouraged consumption.

The first was the equity market. During the 80s and 90s, capital gains on the FTSE were impressive. With portfolios increasing effortlessly, pension plans prospered. People dodged the difficult task of actually spending less than they receive. However, the dot.com crash, coupled with a few criminally irresponsible tax changes by Brown, and those pension plans evaporated.

There was a similar story in the housing market with its regular cycle of boom, bust, and then even more boom. It sucked many middle aged people into thinking that their three-bedroom semi will provide a sufficient retirement nest egg. The BTL scam was a deluded variation on this theme.

Going foward, the prospects of any follow-on bubble is bleak. Equity markets are unlikely to repeat those two glorious decades of hyper appreciation. An economy with an ageing population is unlikely to be an innovative and productive. As for the housing market, it is hard to see how those semis will keep their value when everyone on the street has the same idea of cashing in and downsizing into a granny flat.

What of those state pensions? Can our newly retired pensions count on the generously of those three lonely workers holding everyone else up?

That famous old cliche - you reap what you sow - seems very appropriate. Today's 50-somethings haven't taken seriously the problems of young workers. Many have been priced out of the housing market, forced to pay off student loans, and taxed heavily once they entered the job market. Today's mistreated young workers will eventually assume control, and it is very likely that they will take a very dim view of their extravagant elders.

A reckoning is on its way. The UK pension system, both private and public, will collapse. There are no short cuts to a comfortable retirement via asset bubbles in housing and equity. Those without any savings will find their declining years both difficult and impoverished.

So what should an ageing spender do as retirement draws close? What is the best asset class out there? I have always thought children were an excellent investment. Treat them well, educate them, and drill in a strong sense of familial dependency. When the time comes, just hope that they have prospered enough to look back and remember their dear old Ma and Pa.

37 comments:

Anonymous said...

Excellent piece! The 'boomerdammerung' is coming and it will be unpleasent for the over-50s. They harbour dreams of white wine and crab cakes, but it really will be night shifts at Asda under a manager named Abdul. And they will deserve this fate; they will have earned it with their wonton and greedy ways. They broke the family structure in the UK.

sobers said...

Sadly the current pensions/savings/benefits system encourages reckless behaviour. If you are in a mundane job, with no hope of ever building up a large enough amount of savings to live on in retirement, it is more 'sensible' to spend everything now, and arrive at retirement age with zero wealth whatsoever. The State will then provide you with income, housing, and if needed, nursing care in later life. If you had scrimped and saved and built up a small nest egg and bought your own house, all this frugality would be held against you. Any benefits you were due would be reduced by the 'notional income' from your savings, leaving you no better off than your spendthrift neighbour. And if you need to go into a care home, the State will take your house too.
The whole system needs rearranging to provide real incentives to save for your retirement, which don't penalise the thrifty.
Personally I think the 3 (or 5) year rule should apply for all those in aged 18 to 65 - no more than a fixed number of years on benefits would be allowed in a lifetime. The young can work and should be made to. The savings could be ploughed into higher pensions for all, and no means tested benefits.

Anonymous said...

Alice, interesting but I disagree about downsizing. My mother for example, lives in a large house and receives state assistance via council tax relief, state pension.
Essentially, she will never downsize because she doesn't need to and doesn't want to change her house, which is pretty common for old folk.

I don't think there will be a flood of downsizing in 10 years because although it would certainly make sense financially, I don't believe most people want to start living somewhere smaller unless they absolutely have to, and they don't absolutely have to.

albert said...

The government should supply free cyanide pills, and a bottle of whiskey.

blooKat said...

Anon 14:44

"I don't believe most people want to start living somewhere smaller unless they absolutely have to, and they don't absolutely have to" - YET.

Tax if you die Tax if you dont said...

Alice,

this is awful - the whole piece can be summarised in one sentence as follows:

"There are a group of people in our society that are to blame for all our current and future problems and must be punished".

This kind of attitude is alarming.

Sackerson said...

I think Alice is right. The old are selfish, and the elderly Love generation even more so. You won't enslave the young forever.

Sackerson said...

I think Alice is right. The old are selfish, and the elderly Love generation even more so. You won't enslave the young forever.

Nick von Mises said...

Alice,

I'm glad to see you address the demographic issue. Good article.

Anonymous said...

Alice,

"Three private sector workers will be sustaining the remaining seven" - it's a Victorian illustration from John Ruskin and Robert Tressell amongst others. If I remember, their ratio was 1:9 when children, mothers and housewives are included.

However, they were campaigning for a fair day's work for a fair day's pay with state benefits for those unable to work. Not the starvation of all unproductive citizens

Have times changed so much ?

Mike O

aSteve said...

Pensions, I think, are critical... it is the other side of the investment coin. Over the next few years, it is going to become apparent that the retiring generation are not going to be able to fund their lifestyles as they expect from their pensions... and (amusingly, for those with a dark sense of humour) this will happen for many shortly after the value of their home has completely collapsed.

It's going to be an ugly situation for many over the next decade or two.

electro-kevin said...
This comment has been removed by the author.
electro-kevin said...

Anon at 14.44

For a decade I lived in a beautiful cul de sac just outside London and half of the family houses were occupied by elderly widows. It remained so for around a decade before it became too much for them and they went in to sheltered housing.

To my mind the elderly often leave this move too late for themselves and put unecessary pressure on housing stock.

We don't ever 'own' homes. We just borrow them and should always remember that.

electro-kevin said...

agree with all but the last paragraph of this post.

I expect that I shall exhaust myself financially and physically putting my twins through university only for someone more canny than I to try and enslave them.

That's why my one and only aspiration is to educate my boys well enough that they can leave this god awful country - I have no plans for myself.

The presumption is that those children well qualified enough will carry the country and dutifuly repay the debts of their elders whilst themselves living in poverty.

Whomsoever thinks this way ought to think again. You won't be making slaves of my boys.

dearieme said...

Funny that, e-k. My daughter fancies Australia or even Argentina.

Sackerson said...

E-K, DM: I think you're quite right to make these plans in personal terms; if you're totally convinced that we really have completely lost the battle for democracy in the UK. Otherwise, stand and fight.

mitch said...

as Chancellor, the Treasury, FSA etc all knew we were heading for disaster. You were warned by the IMF as well as the EU central bank but ignored it.

These are the IMF warnings which give the lie to the your protestations of innocence:

1) Dec 2003 IMF gives Brown borrowing warning

2) Sep 2005 IMF report warning over £1 trillion mountain of debt

3) Sep 2005 Brown besieged over growth and borrowing plans

4) Dec 2005 IMF fires new warning over Britain's finances

5) Sep 2006 IMF warns over possible UK property crash

6) Oct 2007 IMF report UK house market is 'heading for crash'

7) Apr 2008 IMF: UK vulnerable to US-style housing slump

This October, the IMF said that the UK was worst placed of all the major economies to weather the coming recession.

Thanks Gordon.

It needs to be repeated every time a Labour Minister gets on the TV and says it couldn't be foreseen ........... YES IT COULD. YES IT WAS. GORDON IGNORED THE WARNINGS. "

dixon_cox said...

sackerson said: I think Alice is right. The old are selfish, and the elderly Love generation even more so.

Nice stereo-typing there. Swap out "old" for "blacks" or, heavens forfend, "muslims" and suddenly you don't look so cool do you? The elderly people I know are, to a fault, kind, courteous and generous. Good luck with the ageism.

zed said...

dixon cox

I think you are exaggerating slightly. The "old" are being "accused" of two things; overconsuming, when they should have been saving; and expecting a state pension, when actually everyone knows that the government won't provide one.

Zed

zed said...

dixon cox

I think you are exaggerating slightly. The "old" are being "accused" of two things; overconsuming, when they should have been saving; and expecting a state pension, when actually everyone knows that the government won't provide one.

Zed

Nick von Mises said...

Being black isn't a choice. Being muslim is. Being old isn't a choice, but squandering your career earnings in the expectation that you can rob someone else's kids (or being so worthless as a human that you never even think about your future) is a choice.

The boomer generation squandered the wealth built up by their parents, then decided to squander the wealth of their kids and grandkids. It's treasonous. Public sector pensions are the worst because they stole from the taxpayer their whole career and now want to do it in retirement without even that thin pretense of working for it.

I'll be looking after my parents. But as the number of Age Concern chuggers on the high street rises I'll be ready to fight them when they try to dip their fingers into my wallet.

dixon_cox said...

Maybe I'm focusing on an age group older than is actually being discussed. My father "squandered" two and a half years of his life in the back end of a Wellington and to the best of my knowledge has yet to deprive anyone's children of the fruits of that labour.

Alice Cook said...

I think these comparisions between the old, black people and muslims aren't terribly helpful. There is a serious question about savings and investment in the UK and it has nothing to do about being unpleasant to grandma.

It is a fair question to ask whether today's generation have the right to pass the costs of their current life style onto their children through borrowing via the public sector.

Alice

dixon_cox said...

Alice, a fair point. I was unable to prevent myself from leaping to judgement about comments I felt were stereo typing the old. My parents generation were savers and sock darners. They are still alive and have never been feckless in any way shape or form.

Sackerson said...

@dixon cox: apologies for being too loose in my expression. My father fought in WW2 also, and would have been in despair at what's happened to the country. But there is a serious intergenerational wealth-distribution problem now. I teach young people (difficult ones) and am sensitive to criticisms of hoodies, etc; I don't see how the younger workers and those soon to come into the system can be expected to maintain it. And I grew up with the Love Sixties lot, and am ashamed to be associated with their self-obsession. My generation really let the side down.

dixon_cox said...

sackerson. Thank you for your comments, they are appreciated. My maternal grandfather fought from the retreat at Mons until Armistice day and got out of the trenches alive after a tad more than 4 years in them. I admit to being sensitive to disparaging comments about the elderly. We post war lot have had an easy ride which is what I guess this thread is really all about

Anonymous said...

dixon_cox

I think everyone would recognise the contribution of your grandfather's generation. It was the shower that followed that caused all the problems.

electro-kevin said...

Anyone younger than 70 and older than 40 are the generations we're talking about, Dixon Cox.

Sackerson said:
"E-K, DM: I think you're quite right to make these plans in personal terms; if you're totally convinced that we really have completely lost the battle for democracy in the UK. Otherwise, stand and fight."

It would need so many of us to make any effect and to ensure some level of protectio. If my experience as a union rep, or even as a fund raiser for the Boy Scouts yesterday, is anything to go by I wouldn't expect any back-up from our selfish, gutless and suppine population.

Nu Lab are successful because they win through things failing. Failure is our default mode and each failure draws more power into their grasp - most recently this includes the banks.

Their biggest failure - the underclass - provide the unwitting centinels of the Nu Lab state. An army of amoral, nasty, tattooed bastards to whom's mercy I and my family shall be thrown should I default on a couple of mortgage repayments. A short term at Her Maj's leisure would ensure that my boys pay a hefty price.

Nope. Forget the country. I'm protecting my genes and embracing globalisation for once.

Nick von Mises said...

Dixon, I second E-K on the age range. It's the boomers who robbed us under-40s, not the "greaterst generation".

a responsible golden oldie said...

Some supercilious comments on this thread by younger readers who fail to recognise that many of us 40-70 somethings (a range I would amend to 49 upwards) in fact worked hard and diligently for what we had/have - including making regular, sensible and cautious savings over 40-odd years into what were considered reliable and well run company and/or private pension funds. Maxwell's antics destroyed a lot of faith in them, but the final nail was Brown's implementation of a vicious policy changing the rules and thereby robbing these savers of their lifetime efforts at safeguarding their own futures, well knowing that the State pension would not provide sufficient cash for their needs. This single act of blatant daylight robbery of other people's money, and the consequential closing of many/most of these funds, have left many careful, considerate and responsible financial planners up the proverbial creek sans paddle.

The vengeful actions, despite much sound advice to the contrary, of one man and his ideologically flawed colleagues, together with those of outrageously greedy and irresponsible bankers over the past 20 years or so, should be blamed, and held personally reponsible, for the current fiasco - not the generally financially responsible oldies who I suspect are not the ones up to their necks in unrepayable debt.

I have no hesitation in suggesting that it was the rather younger generation (say 25-48 range) which caused all or much of the trouble by their (unthinking?) irresponsible financial activities. It is their chickens which are now coming home to roost and they and their offspring will be the ones who have to pay.

vado said...

Dear responsible golden oldie

At least we are talking about identifying the culprits. Someone somewhere must have taken out those loans.

Sackerson said...

@Responsible golden oldie: I apologise (again) for my dumb generalisation. What I had in mind was actually a number of groups within the generation now in its 50s and early 60s. We have been weakened economically, politically, socially and educationally by people who in many cases did rather well from themselves out of it. Stupid of me to have cast the net too wide and offended people like yourself.

Anonymous said...

Sackerson, it is subset within that group. There are some savers, but most are spenders and borrowers.

It starts at the top - the government - who set the tone. Then everyone follows.

Anonymous said...

I think the piece missing from your article is that the three workers may choose to work elsewhere. The breakdown of nuclear families means that few are tied to the UK.

I also think people in their 20s/30s/40s and 50s are at risk as they've all benefited from huge increases in government debt, personal debt and balance of payment deficits. The worker in China/India is unlikely to find much value in a pound at somepoint in the near future significantly reducing the ability to consume.

Alice Cook said...

Anonymous 18:40

Indeed, the three workers might decide to move elswhere. I agree with your point about the breakdown of the nuclear family. No one feels particularly attached to the UK anymore.

Alice

fruit box said...

A big generalisation Alice, not everyone is so disenchanted. I'm 35 and have lived in South West England for most of my life, like my parents. I hope my kids will stay here when they grow up too.

SimonHamer said...

It is a big worry.
Brown's policies of ripping of the pension funds, causing the house price bubble and an economy growing on nothing more than immigrants spending.... the UK has been duped. Now we're about to pay the price. Boom and Broke with Brown as will become known !