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Post No.: 0593pensions


Furrywisepuppy says:


For a nation, people living longer presents both pros and cons. This is because the elderly and retired don’t work yet generally require more healthcare – thus if the current generation of elderly are living for much longer than anticipated and planned for after the retirement age that was set for them, this might result in a pensions crisis, as well as a strain on public health services. It’s like a country’s national health service being a victim of its own success!


So maybe, like in some cultures of the past and present, we need to retire the concept of retirement? There’s probably more uncertainty about the future of work/jobs than ever before though, even for those aged between 25 and 65, never mind older.


We must understand that generations don’t really, through taxation, pay for their own future pensions – owing to the fact that people don’t really know how long they’ll individually live for. Even with private pensions, most people underestimate how long they’ll live for, hence many will need to rely on a state social security safety net. There’s a contract across generations. The working-aged support the old (and children and the disabled) in a conveyor belt – but not all generations get the same as what they put in due to differing economic climates during their working years, differing population sizes and differing average life expectancies when they retire.


Most state pensions, including in the UK – and this post mainly focuses on a system like that in the UK – are paid by current taxes (pay-as-you-go), not by taxes put in by people’s own generations. The government’s response to worsening support ratios (the current number of workers to non-workers, which affects how much tax is being collected versus how much is being paid out in pensions and benefits) can be to either increase taxes on current workers to pay for current pensioners, increase the pension age for current workers so they’re working for longer and not claiming pensions so soon themselves, cut pensions for current workers when they retire, and/or to ask current pensioners to take a cut to their pensions. The latter is unpopular though because of the power of the ‘grey vote’. Current pensioners also tend to be protected with guarantees because they have less scope than current workers to replace lost income.


Because pensions are paid out by current taxpayers and not by a pensioner’s own generation, the ‘baby boomer’ generation – who are receiving their pensions now, with their longer life expectancies and therefore longer pension age durations than expected and planned for – are putting extra stresses on the current generation of workers. This is on top of recent and current generations having fewer children, which places a larger burden on those fewer children to support the greater and longer-living older generations. Having fewer children to support one’s own generation when at pension age reflects in care for the elderly too. (Promoting fertility cannot be the (complete) answer though because overpopulation introduces problems too.)


So state pensions aren’t enough anymore and people must also save in private pensions or other kinds of savings for their own retirement. However, saving is disincentivised when interest rates are low! They’ve been low as a lasting legacy of the 2007/2008 Financial Crisis, and COVID-19 isn’t going to change that soon. (Attacking and making scapegoats out of the poor, disabled, unemployed and pensioners is easy because they’re easy targets – but we must remember that the 2007/2008 Financial Crisis, caused primarily by the financial sector, directly wiped a hefty chunk out of pension pots and therefore contributed significantly to pensions crises worldwide.) Through monetary policies – there are conflicting messages between encouraging us to spend now, yet wanting us to save for our futures.


Older generations also generally had it luckier with regards to pensions – they had/have better state pensions (defined benefit schemes), and more private companies in the past offered ‘jobs for life’ and final salary schemes. Public sector workers today are still relatively fortunate though and have more secure pension schemes, as well as more prospect of a job for life, whereas private jobs today are generally less secure and private pension schemes are more risky. (Yet some of those from the generations that got jobs for life, affordable housing and favourable pensions tell younger generations that they’re ‘complaining millennial snowflakes’ who simply lack a hard work ethic(!) This is silly because the older generations are partly responsible for the younger generations they criticise – they made them, raised them and left them what they left them.)


With ‘defined benefit schemes’ (assured pension payouts per year in retirement) – if the pension system is under stress, it won’t be the current pensioners (who were promised what they were promised whilst working for their retirement) who’ll suffer but the future pensioners i.e. current workers, who’ll tend to be the ones who’ll experience any cutbacks to their own pensions and/or will experience a later retirement age.


Hence a move towards ‘defined contribution schemes’ (pension payouts linked to how much one personally pays in plus the state of the economy when one finally cashes out on one’s pension) via private pensions (opt-out workplace pensions) – where each individual bears the risk of their own pension, including investment risks, inflation risks, or living longer than expected but only saving for so long. Private pensions involve more risk and luck – the economy may be great or not so great when one finally retires and this’ll be reflected in one’s pension pot when one decides/needs to cash out.


People can save in any way they like for their retirement though, including investing in assets – but if second homes are being used as assets then younger generations get screwed over again because they’ll help the homeowners pay their mortgages off when they rent these places to live in, yet cannot obtain property as a source of (appreciating) wealth for themselves, because they’re being hogged by older generations who’ll only liquidate these assets when they retire. There’s also a risk of asset price bubbles that’ll burst if a large generation of savers suddenly needs to liquidate their assets for retirement.


Regular homes can be unsuitable for the elderly without major conversions to make them safer for them, so it’d arguably solve two problems if more elderly people moved into sheltered accommodation and in turn freed properties that are usually under-utilised (lots of empty bedrooms) so that younger generations can get onto the property ladder too. On the surface, this seems obvious and easy. It however might not be if the sheltered accommodation isn’t attractive for the elderly and/or developers don’t want to develop them because they’re less profitable than building other types of properties; hence the government needs to step in to make it work. (Another thing that seems obvious and easy to solve on the surface is that there’s an obesity crisis in some parts of the world yet people still starving in other parts! But reality is more complex and nuanced. Woof.)


Younger generations will bear the costs of saving more because they’ll have to give up more consumption today to find that extra to save for their own futures. They’re also not guaranteed a good outcome when they reach retirement themselves – some generations may be lucky and have higher pensions, and others may be unlucky and see far less in return from their savings. Being able to afford to save anything in the first place is linked to income levels (one needs spare/disposable cash i.e. not for immediate food, bills and other necessities, to be able to save anything in the first place), hence this solution is likely to perpetuate income inequalities, with those who were poor before retirement likely to continue being poor in retirement as well.


So just like there’s a lower limit to the voting age and we need other people to vote on behalf of the interests of children – maybe, highly controversially, there should be an upper limit to the voting age too? Public spending and resources should arguably be mostly used to serve the current and future productive furry generations. Children should be prioritised over the elderly because they are the future. Wise elders – even though they hold the power over youngsters – should agree because the youth are one’s legacy. (Serving ‘selfish genes’ isn’t always the same thing as being ‘selfish people’ – it’s often good for our genetic future to be altruistic.) Alternatively, if young adults just voted more then their interests would be served more by governments – it’s a simple case of the forces of ‘supply and demand’ in a political context.


Pre-COVID-19, over 85s only made up ~2% of the UK population but took up ~8% of the NHS budget. And since they’re relatively more fragile, they typically get priority for operations, which pushes younger people down the waiting lists – younger people who, if fit again as soon as possible, could get back to work sooner. It can take more than one carer to look after the elderly, yet although demand for carers is high, the pay doesn’t make it an attractive career for many.


So some ideas to try to improve the support ratio include retiring later, increasing immigration (immigrants tend to be of working age (according to the Office for Budget Responsibility, 2015) and are economic migrants so they work, spend, pay in taxes and claim fewer in benefits than the average person), increasing savings (but this’ll only be effective if the savings are invested in a growing economy), using existing transfers of national income more efficiently (private pension schemes involve charges payable to actuaries, fund managers and other intermediaries who each take a cut and so reduce the amount that ultimately reaches pensioners, whilst state schemes are not free to run but tend to be a good deal cheaper because there are fewer middlepeople taking a cut), and/or asking current pensioners to bear some cutbacks to state pensions in some way if they’re not sustainable (such as by deferring inflation-linked increases). All generations should ideally share both the risks/costs and benefits.


Private pensions aren’t the panacea, but they work alongside defined benefit state pensions that ensure at least a basic pension that’s liveable on, because we should live in a civilised society that doesn’t just abandon and condemn the old and unfortunate. The state pension can ensure a liveable pension, and a private pension can bolster that if one wants a nice and comfortable retirement.


Pension schemes based on either the principles of need (help is given to those who most need it) or equality (everyone gets the same amount regardless) reduce inequality. These are arguably more efficient, utilitarian-wise, than schemes based on the proportionality principle (everyone gets out what they can afford to put in, with or without risk), which may deliver more to higher earners and less to lower earners than the amount deemed necessary for a comfortable retirement.


…Living longer and healthier old ages is a good thing though so we need to keep some perspective! But it’s fair for the retirement age to rise in line with life expectancies, perhaps so that the retirement duration is always 25% of one’s expected lifetime; although such predictions of future life expectancies are liable to error. Businesses must also employ older people; although this is difficult if this means taking jobs away from younger workers, which would just shift problems to elsewhere rather than solve them.


Like all ‘crystal ball’ long-term-forecast situations though – there are seldom incontrovertible right or wrong answers without the benefit of hindsight, but we’ve not got the benefit of hindsight until it’s too late.


Woof. Pensions are a deeply complex matter, one post cannot hope to do it justice, and many people will have their own political opinions and ideas for solutions about it. This is only intended as an introduction to the subject if you’re not already interested in it – which I reckon we should all be!


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