What time-bomb?

Michael Howard says: "Everyone knows the country faces a pensions time bomb."  Everyone except me. I'm not sure there is a problem at all.
Let's first tidy up the facts. Mr Howard says that "nearly half of Britain's workforce are not putting any money aside for their retirement."
I presume he's referring to page 63 of this huge pdf. It shows that 45 per cent of working age people - 15.3 million - are not contributing to a private pension. However, this number includes people with accrued pension rights from previous schemes, the very young, and people who don't expect to live to pensionable age. What's more, contributions to private pensions are not the only way in which we put money aside for retirement. The Pensions Commission has estimated that non-pension financial wealth, at £1150bn, is close to the value of pension wealth, of £1300bn. And this is not to mention the £3000bn of housing wealth.
Mr Howard therefore almost certainly exaggerates the problem of deficient saving.
So, what is the real, hard evidence that people aren't saving enough for retirement? The most commonly cited factoid is the £27bn savings gap (pdf).
This estimate, though, is  just plucked out of the air. It's based on some economists' guess for how much people would like to live on in retirement. This isn't economic analysis. It's advertising. The study was commissioned by the Association of British Insurers. What do you expect them to say - that we're all saving way too much and so should hand less cash over to their members?
Some proper analysis has come from Sarah Smith of the IFS. She's found that people who retire voluntarily generally have enough to live on, because they did not cut their spending. The only retired people who did cut spending, she found, were those who were forced to retire through ill-health and those who retired at the state retirement age. And the latter group, she found. were happier in retirement than when they were working - which suggests their lower spending isn't a serious problem for them.
Current pensioners, then, seem to have saved enough for their retirement.  Indeed, one hard fact suggests many people save more than enough. These figures (pdf) show that in 2001-02 the 265,005 people who died after making a will left a total of £42.1bn. This suggests that thousands of people save more than they need.
You might object that all this only shows that there hasn't been a problem in the past. But there will be in the future, given that expected returns on savings are lower now than in the past (because the dividend yield on shares is below average), and yet the savings ratio is lower.
However, the lower savings ratio now could easily be explained  by increased job security and lower inflation, rather than by a fit of imprudence. And the dividend yield still implies a real long-run return on equities of around 6.5 per cent, which compounds nicely (albeit with big risks, but twas ever thus.)
Evidence from the US - where the personal savings ratio is also low - provides other evidence against the view that there's a savings gap. These guys have found that the vast majority of Americans do save optimally, and that those who don't fall only slightly short. And these guys have found that the falls in spending following retirement are due not to people living in straitened circumstances, but to the fact that expenses are low when you don't work, and so you don't need a high income.
Maybe, then, there isn't a time-bomb at all. Perhaps politicians should try and face an awkward fact - that people are rational.
Of course, this is controversial - I've only started a ball rolling. But I'll leave you with four thoughts.
First, even if there is a "time-bomb" it isn't clear that Mr Howard's proposal for bigger tax credits on pension savings will solve this. People might respond by cutting the amount they save, thus leaving anticipated retirement income unchanged.
Second, if people are irrationally saving too little for their retirement, why are we trusting them  with the wisdom to choose our next government? If people are irrational about important decisions where they'll pay the consequences themselves, won't they be more irrational in decisions that affect others?
Third, if the pensions time-bomb is a problem, there are other solutions to it - the development of better-value home equity release schmes, and a flexible retirement age, for example.
Finally, the risk of us not having enough to live on in retirement is only one danger. The other risk is that we can save too much, and so deprive ourselves of a happy life. For me personally (and I save a lot), there's a danger that I'll reach old age without a stock of happy memories to look back on.  Not many people, on their deathbeds, regret not saving enough.

Comments

[dearieme]

"there's a danger that I'll reach old age without a stock of happy memories": cheer up, it's not spending money that provides the happy memories. There's a Gershwin song that asserts "Life can be delish with a sunny disposish", and there's even a recording of it with Bix Beiderbecke on cornet. Enjoy!