Some depressing thoughts about pensions

[Bumble]

Some thoughts about the future of pensions. This applies to the UK, but I strongly suspect that other developed countries, including the USA, are in the same boat.

We can divide the issue into three points. The first concerns the state of private sector pension schemes, the second concerns the state of public sector pension schemes, and the third is the conflict that is likely to result because of the previous two.

1. Some private sector schemes are of the defined benefit kind, while others have a defined contribution. Many, if not most, defined benefit schemes are hugely underfunded or actually insolvent. This is because highly rated bonds and stocks, which are the staple investment of pension funds, are expensive and have a tiny dividend yield. Pension schemes are subject to actuarial audit, but actuaries are permitted to assume a 7.5% compound annual future return on investment. This is still the standard percentage in use, even though interest rates and levels of economic growth are much lower. A lower and more realistic assumed percentage would result in a huge deficit when compounded year on year over the lifetime of a pensioner. Defined contribution schemes cannot strictly speaking be underfunded, but the problem is similar because a realistic rate of return would show that most people will not be able to afford to retire at the level of income that they expect or need.

2. Most public sector schemes are of a defined benefit kind with inflation linking. Some are entirely unfunded and are in effect just Ponzi schemes. Others are partially funded but typically in the same underfunded state as defined benefit schemes in the private sector. The difference is that the tax payer is liable for meeting these pension obligations. The unfunded or underfunded pension liabilities are not an explicit part of the national debt but are 'off balance sheet'. The scale of the national debt together with these unfunded liabilities is so great (and growing) that it will become unaffordable. A point will be reached when the governments of the developed world will be compelled to default on or inflate away some of their liabilities. Inflation is the softer option, but this conflicts with the inflation linking that is part of pension benefits.

3. This brings us to the coming clash. Price inflation reduces the value of private sector pensions and leaves pensioners with reduced purchasing power. Inflation linking theoretically leaves public sector pensioners with a constant purchasing power, but these pensions are unafforable and have to be paid for out of general taxation. Public sector pensioners will say: we worked our lives in the expectation of receiving this index-linked pension, and it is part of our contract of employment, so we are entitled to it. Private sector workers will say: you have contributed little or nothing to the cost of your pension and we are now forced to pay out of our taxes for you to have a pension that is far better than what we can afford for ourselves. Both parties will be correct. Any attempt to reduce public sector pensions will bring the public sector unions out on strike. Any attempt to seriously disadvantage private sector workers and pensioners will cost the government the next election.

I speculate that in order to avoid this conflict, governments will nationalize private sector pensions. Occupational schemes and individual pension schemes will be taken into public ownership in exchange for a promise of pension payments from the government. This will not solve problems one and two. The private sector pensions are still underfunded and by nationalizing them the government will be taking on more liabilities than assets. But the investment assets can be set against liabilities on the balance sheet, bringing down the official government debt, while pension liabilities remain off balance sheet. The government's financial status will look much better. Also, it places private sector and public sector pensioners on the same footing. Both are now dependent on government payments. Both groups are likely to see their benefits reduced to make them affordable, but at least they are not being disadvantaged in comparison to the other, which defuses the conflict.

[KDave]

Nice post and very interesting conclusion; compared with my own musings on the future of our pensions, your conclusion is not depressing at all! 

I believe that the numbers will win out in the end and by the time I retire (in potentially 40 years), there will be no government pension unless you have nothing. The pension will be for the most destitute of individuals only, much as working age benefits are being slowly reformed already. The trend is for government to move liabilities off the books where possible, especially regarding pensions, and they are laying the ground work for people to support themselves, or for employers to take on the burden. Public sector pensions will be cut again, I believe this is far more likely than taking on more obligations despite the possibility of using accounting tricks in an attempt to prevent the inevitable. I would definitely prefer your version to mine though, you are much more optimistic. 

Evidence for my conclusion - Introduction of compulsory work based pension schemes, introduction of lifetime ISA for those under the age of 40 (!!!), consistent gradual increase of state pensionable age (!!!). Life expectancy in the UK has also been falling for the last 3 years, - perhaps the goal is for these things to meet somewhere in the middle - make life expectancy fall and increase the state pension age to the point at which they cancel each other out?  

Either way its not looking good for the young un's under 40. Best to assume the worst now, plan for it, and be pleasantly surprised if the impossible is made possible. 

[Bumble]

I think it is worth distinguishing the state pension from occupational pensions. I agree that state pensions will not be affordable either, so the government will raise the eligible age gradually to 70 and will apply a means test to it. But the scary and depressing part is that the government will grab your company pension and your SIPP, or in the USA your 401K and IRA. At that point nearly every person of pension age will be dependent on government handouts.

[Roy]

It's horrible.

You will still be looked after 'from the cradle to the grave' but if you have savings, they'll take it.

House? Keys please...

Still, lots of jobs available for immigrants in care homes I suppose.

[vand]

You may be correct from an economic/mathematical standpoint, but you are entirely incorrect from a political standpoint.

Yes pensions a ponzi scheme and as such unsustainable by definition, but there is no stomach from any political party to reform the system, much less nationalize private pensions. The sanctity of private property is not something that is going to just be overturned because of trivial matters such as affordability.

 

If you believe the state will nationalize pensions then you must also consider that they would probably enact private PM confiscation also. In fact I would say that this was more likely, and it has even happened in the past in the UK.

[silverdreamracer]

On 17/08/2017 at 20:15, Roy said:

It's horrible.

You will still be looked after 'from the cradle to the grave' but if you have savings, they'll take it.

House? Keys please...

Still, lots of jobs available for immigrants in care homes I suppose.

Blame the immigrants again... If its not, 'they are coming over 'ere stealing our jobs' etc... Then its, 'they are lazy good for nuthings' etc. Yawn. So predictible.

Can't wait for the government to steal the rest of your money.

[Roy]

 well, you misunderstood me there!

My comment was a ironic poke at the immigrants' wages being taxed to provide the cash for the old folks' pensions that they pay the workers' wages with....the circle of wealth if you will.

Still, if it made you feel good ?

(Psst...I'm a migrant worker meself ?)

[onlyroadtoheaven]

47 minutes ago, Roy said:

  immigrants' wages being taxed to provide the cash for the old folks' pensions that they pay the workers' wages with....the circle of wealth if you will.

 

This is so true. This country needs immigration to pay for its current pension obligations.

 

50 minutes ago, Roy said:

 

a ironic poke at the immigrants'

Please don't poke immigrants Roy. Its morally questionable.

[reidpj]

No such thing as 'the circle of wealth'

 

The UK Government, as the sovereign issuer of a free-floating, fiat currency, does not have an income (taxes pay for nothing); it spends all £ into existence, and uses taxation, and 'borrowing', to destroy its spending if needed.  The UK Government cannot go bankrupt using £ - it can create as many £'s as it sees fit.

The UK may need immigration  to provide the physical care for the elderly; it certainly doesn't need it to provide the finances.

[HawkHybrid]

is the current economy being part funded by retirement

money? are we all (on average) not saving enough to

be able to retire?

 

HH

[KDave]

It depends how you want to see it and how you break down the deficit spending - but in effect, some of the wealth that is being spent on pensions today is funded in part by increasing the national debt - future wealth is being reduced to meet obligations today, that were promised long ago by politicians no longer accountable. In effect, those of us left to pick up the tab in the future, will be left paying off the debt from someone long dead first, and then anything left over will be our pension (after benefits, NHS payments, foreign aid budget, whatever the political flavour priority of the month is). Luckily (for the current system to continue to function) and sadly (for the suckers paying tax/NI with 40 years of work ahead of them), the majority are ignorant of these realities and continue to contribute to their 'pension' with national insurance contributions that is nothing more than a secondary income tax spent as soon as it is taken.

It is extremely likely pensions will be significantly reduced in the future because of the national debt, and with current political priorities it is a mathematical certainty. In this context, the future majority can expect poverty in retirement, unless we save more than previous generations for our own retirement.

Hopefully I have got it all wrong and someone can cheer the thread up a bit.  

[Bumble]

@HawkHybrid Savings and pension contributions in the UK are not sufficient to allow people to retire comfortably. When the bulk of the baby boom generation reaches retirement age and discovers they cannot afford to retire, there will be hell to pay. There will also be a deflationary impact on the economy, because people who retire tend to spend less: they replace their car less frequently, for example. In the USA, it is noticeable from the non-farm payroll numbers since 2008 that the numbers of people in employment in the over-55 category has increased. This suggests that older people either cannot afford to retire or are being forced out of retirement and back into the workforce because of low returns on their investments.

@reidpj I don't buy the idea that sovereigns with their own currency can create limitless amounts of currency with impunity. Currency depends on confidence to function, and any country that creates large amounts of currency without respect to its ability to cover it with future tax income risks a currency collapse. The UK can indeed print any amount of sterling to pay off its sterling-denominated bonds, but foreigners will not turn up to bond auctions to buy any new ones if they know the currency is at risk. Japan is - for the present at least - getting away with huge amounts of money printing because nearly all of its debt is owned by Japanese savers. The USA can also get away with money printing because the USD is still functioning as the world's reserve currency, so there is a steady demand for it. For other countries, especially the UK which is a trading nation and needs foreigners to trust its currency, printing currency is highly perilous.

[mr-dead]

I received my personal pension illustration yesterday from my company showing how the proposed changes are about to personally affect me.

Approx 30% less than the original scheme.

I have another 25 years to go so no doubt that figure will be eroded further over time.

My stack is plan B pension top up fund.

[sixgun]

i have mentioned before on another thread about these pension fund pensions. For those with a couple of decades or a decade to go i think they will get nothing. ZERO. i suspect this thought is hard and often too hard to contemplate for quite a few so it gets dismissed. 

These pension funds are not meeting the draw down on them now, so they certainly won't as that draw down increases as people retire. The government pensions are totally unfunded, contributions were never invested. Interest rates are very low, bond yields very low. Much of the pension fund investments are in bonds which give a regular income. As bonds mature if fund managers want to remain invested in bonds they have to buy current low yield bonds. Funds will be completely in low yielding bonds or they have to buy crazy junk to get a higher yield.  If interest rates go up, if we hit anything like inflation, the bond yields will rise; things like this always happen. So if a bond yielded 2% and sold at £100 and its yield rose to 10% - [we have seen this before, we have seen higher] then the bond price follows to £20. Not an issue for bond buyers moving in but for current bond holders, their bond has just lost 80% of its value and is still only yielding 2%. A yield of 2% in these circumstances would be next to useless as inflation is now multiples of 2%. The pension fund cannot pay out anything decent to retired members, if it tries to it will quickly go bust, it is going to collapse anyway. Share prices are very high on historic valuations. Thing revert to the mean so these valuations are going to get a severe haircut at some point. None of this bodes well for pension holders. This is why investing in gold and silver is so important b/c gold [and silver] is the ultimate hedge against inflation, it is the only real money and shines when everything else is turning to sh*t. 

[Jimmock]

I'm 53 just now,have a pension from a previous job,which I had looked into transferring. But have decided that in 2 years time I'm just going to cash out as a lump sum. I realise I'll lose a chunk in tax,but would much rather have the remaining lump sum than the pittance I would receive monthly when I get to pension age.

[sixgun]

58 minutes ago, Jimmock said:

I'm 53 just now,have a pension from a previous job,which I had looked into transferring. But have decided that in 2 years time I'm just going to cash out as a lump sum. I realise I'll lose a chunk in tax,but would much rather have the remaining lump sum than the pittance I would receive monthly when I get to pension age.

I took my tax free lump sum and pension early - i figured that by the time i got to take the pension there would be no pension, so the cash came out and it went into precious metal. It is mine and it is in my hands. They will steal our accounts but the hell they'll get my real money.

[sovereignsteve]

4 hours ago, mr-dead said:

I have another 25 years to go so no doubt that figure will be eroded further over time.

My stack is plan B pension top up fund.

By the time you retire, you will have more gold than Fort Knox

[wilky1]

On 26/09/2017 at 19:52, sixgun said:

I took my tax free lump sum and pension early - i figured that by the time i got to take the pension there would be no pension, so the cash came out and it went into precious metal. It is mine and it is in my hands. They will steal our accounts but the hell they'll get my real money.

I found an old pru pension the other day that I had ignored due to it only paying out £1800 a year ( I canceled it 25 years ago as we were broke ) I have just had a cash value of almost £25,000 less tax quoted on it.     Yep its being cashed in and a large portion will be put into gold in my hand as well.

[utoh123]

Nationalize pensions?   It is called Social Security.   Those who cry over inflated pensions dont have my sympathy.  They have to seriously cut it.  Public servants getting pensions of $120k and more.. all on the backs of tax payers.  The stock market is at record highs so that should shore it up.  But we all know 7.5% is a lie