John’s Blog No. 145 – Pensions State

Of course the real problem is the State is in an unsustainable pension situation, is incapable of running pensions in a sensible and fair manner and is plugging holes in a rapidly collapsing Dyke. It needs to hand these over to existing independent bodies capable of running pension savings and meet its pension liabilities in a controlled manner. The State and Public Sector pensions, due to their nature, cannot give a good or fair return on the National Contributions made, because these contributions are not saved to accumulate and grow as in a normal funded scheme, but are spent immediately on the existing pensioners. This absurdity creates age dependency of the retired on those in work, instead of the self-sufficiency associated with each member building his own individual pension pot for his retirement. The position is set to get much worse, with pensioners projected to grow by 50% over the next 30 years, whilst those in work remain unchanged. Someone on the average wage of £500 per week, with their Employer will pay 20%, £100 in NI contributions per week, of which £80 is spent on pensions and £20 on the NHS; by 2041 the pension spend will have risen to £120, requiring NI to rise to £150. This is obviously not affordable by those in work or the State. The present measures of the single tier pension and delayed retirement will not meet this shortfall and are just tinkering with the problem, painting the cracks in a ceiling that is falling down. Change to a fully funded scheme to break the dependency chain is the only solution and the matter is extremely urgent. The existing State pension liability is the reason why this cannot be a simple or quick fix. This is now put at £3,200bn for the basic pension with a further £600bn for the second pension; although not treated as such, this is a National debt owed by the State for past NI contributions, which has been squandered by successive Governments. To put these large numbers into perspective, each person of working age 25 to 64 has a pension dependency debt of £125,000, effectively a mortgage on their future retirement, which hopefully the next generation will be able to also meet, when they retire themselves. This situation will get steadily worse as the retired population rapidly grows and this has led to pensioners being considered as a burden, yet they paid large NI contributions over their working lives in the belief that they were saving for their retirement future. It is the system which is wrong! The new workers pension (Nest) is effectively a back door method of increasing contributions to supplement the poverty level State pension. It is unfortunately based on the failing Defined Contribution Scheme, which loses money in real terms, being beset by poor performance, high charges and out-dated low Annuity returns. The unfunded Public Sector is in the same situation with liability, excluding Local Councils, being put at £854bn.Their position is in fact even worse as they have paid extra contributions to increase the State pension, but are in the same dependency situation, with the State increasing contributions to meet the problem. The real opportunity does however exist to combine all of these, with existing private schemes, in universal funded pension schemes, run independently from the State, with the conversion of State schemes to fully funded ones. This could be done by the transfer or rebate of NI contributions to these schemes over a managed transition period. Ideally if the State met its existing pension liabilities, this could occur tomorrow, but in the present economic situation the money for such a rebate, amounting to some £60bn per year, could not be readily found. It could be carried out in a virtually cost neutral manner over a transition period of 20 to 30 years. The benefits would be large, primarily securing the pension future in a self- sufficient manner; limiting rebate to a fixed and affordable proportion of NI income; giving a large stimulus to personal additional savings, if linked to these and the creation of large investment funds, which could be directed to UK business and infrastructure.