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August 01, 2016

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Rumplestatskin

Very few economists even realise that every economic problem with public age pensions is also a problem with self-funded pensions through individual savings. My views on the matter here, though looking in reverse at Australia's appetite for compulsory private retirement accounts (superannuation)
http://www.fresheconomicthinking.com/2015/04/self-censoring-on-superannuation.html

Nick Rowe

For non-Brits reading this: Google and the BBC tell me:

"Since 2010, the "triple-lock" policy has meant state pensions rise by the inflation rate, average earnings or 2.5% - whichever is highest."

Probably what Chris means?

Dipper

Chris do you think the rate should be higher? if 2.5% is quite good, then 5% would be really good?

David

And... if we could have been certain that the price and wage inflation statistics were not, nor ever would be massaged, then the third part of the lock would never have been necessary.

Dave Hansell

What's missing here, when considering the issue of the State or the individual, is the fact that there is absolutely zero possibility, as things stand now and in the future, of the majority of individuals ever being able to afford to set adide a sufficient amount of money on a regular basis to fund a pension.

Firstly, because not only have wage stagnated and been falling in real terms relative to profits (which have been going the other way) this past thirty years but also many young people are struggling with high debt loads from passing through university, unable to afford to buy or even rent a home of their own. Putting aside money for a pension is not even on television horizon.

Meanwhile, with so called self employment climbing, the majority actually earning less than £5k p.a., growth in zero hours contracts, and skilled higher paid jobs disappearing abroad or replaced by automation and not being replaced the scope for individuals being able to live, pay off debts, and then put something aside for pension provision is fast disappearing down the hole of its own contradictions.

AI automation is set to do to many remaining blue collar jobs and traditional white collar skilled middle class jobs what robotic assembly lines did to un and semi skilled blue collar jobs and employment in the 80's and 90's.

What makes this worse this time around is the fact that most investment now is mere rent seeking. With companies actually borrowing QE printed money,by Central Banks, to buy back their own stock to keep the stock price high in order to maintain senior management and boardroom bonuses and increases, or spending £40+k a day hire charges, again from QE printed borrowed money, per oil tanker to have hundreds of full tankers parked off coastlines around the world in the hope that oil prices will go up sufficient to cover the costs, rather than in vs roductively.

At present the State is not exactly helping I this regard, cutting public sector employment to the extent that we have to import immigrant labour from places like New Zealand because we have no public service sector employees with the skills and expertise to negotiate post Brexit trade deals. Or cutting investment in industries such as renewable energy, losing some 20,000 jobs whilst spending orders of magnitude more money in subsidies to nuclear energy for only 5,000 jobs (the BBC erroneously put this at 25,000 jobs whilst neglecting to inform it's paying public that 20,000 of those jobs will be in France).

Fact is that the mean's by which the economy functions, circulating money (my wages is your expenditure and vice versa) is grinding to a halts cost cutting take its next logical step of automating more and more paid employment without those jobs being replaced. Pretty soon there will be more and more produced by less and less and we will soon see the day when very few will be able to afford anything, even though we will be drowning in stuff.

What will be and is required is fresh thinking about how value is distributed throughout a society in which the means to live and aquire value through waged employment has broken down. That certainly means a collective rather than individual approach.

gastro george

I think that it's important to revisit why we have savings and pensions in the first place. It's a question of security - they are insurance policies against not having access to resources in the future.

This is why the idea of a living wage is relevant. In the same way that wages and benefits should always be oriented towards minimum living standards, so should pensions - and they remain far below that. As has already been noted, private provision is very inefficient - not that this is a problem with for City who like the rake off. So government policy should be oriented around providing a living pension and also other resources to support our lives.

andrew

"First, let’s dispose of a myth – that the triple lock is yet another of those policies that benefit the old at the expense of the young. It doesn’t."

I may be wrong but Job Seekers Allowance is 73.10pw and basic state pension is 119.30pw

I may have got this wrong but I am geussing

Someone on job seekers allowance will not be agreeing with that statement.

SheepCat

Yes, the triple lock could gradually increase the state pension substantially over a period of decades.

It could gradually transfer the burden of retirement income from the individual to the nation.

It could eventually make private pensions unnecessary.

Could Could Could.

For a young worker deciding how much, if any, to put aside each month, can he or she really have the confidence that the triple lock will still be in place come retirement?

Probably not.
So he or she (and most other people) will continue to make their own provisions.
Then as they near retirement the government of the day will realise that people largely have it covered, and so the state pension may be seen as a cuttable item anyway.

aragon

@andrew: You have got it wrong:

Private Pensions and a low state pension maintain the inequality found in work income, four out of ten only have the state pension, if you are long-term unemployed, I am guessing you will be in the forty percent (in the future) that rely on the state pension.

The injustice continues to the tax relief 20% for basic tax payers and 40/45% for higher rate tax payers.

The state pension is still much too low, and the compound growth needed to double would take twenty nine years assuming no inflation (72/2.5). Of course inflation extends this period, potentially beyond a human life-time.

Pensions are about how we distribute the wealth, just as much as wages. In both cases (wages/pensions) the majority of the public need a much better deal.

rogerh

I suppose what is being aimed at is the 2.5% uplift, the level of wages is probably headed south and prices - well it depends on what you assume pensioners buy. So unless something more radical is being considered we are looking at a saving of 1 to 2Bn/year but compounded. Contrasted with the likely decline in tax revenues pretty trivial.

Old age pensions make up about 45% of the total benefits bill, I should think the remaining 55% is likely to grow far more and swamp any saving from cutting the triple lock.

Then there is the whole concept of pensions as deferred income - 'I earned it fair and square' - true for some but dubious for many. Well the unhappy truth is that pensions - private and public - have been treated as a magic money tree for a long time. Everyone has had their beaks in the pot and the fiddles for boosting the retirement payout are legendary. Time to consider a special tax on all pension income I think.

a random eman

Your point about the value of public pensions is well taken, and you have provided good reasons for them. The problem is that the triple lock pension will constantly increase the value of pensions over and above wages when the economy is doing as poorly as it is. Perhaps that is a good thing, but we need to be totally clear about the implications. The other problem is that I do not envisage Brexit helping skilled immigration into the country, and therefore cannot see how constantly increasing pensions are affordable in the longer term, at least without taxation levels that would crush the living standards of the young.

Bob

"If it remains in place, it will in fact be of greatest value to today’s youngsters."

Maybe. Or maybe not. It is always about distribution of current output to pensioners.

Blissex

«at least without taxation levels that would crush the living standards of the young»

The governments of many anglo-american countries years ago had the problem to plan for pensions for the baby boomers.

They realized that this would result in demands for very high tax levels, and these would then be mostly high tax levels on "wealth creators", plus in demand for very high company pension funds contribution, to fully fund defined benefits tax schemes, hitting the profits of "wealth creators".

So they decided on two alternatives:

* To ensure a retirement fund/pension to baby boomers *in their constituencies* (that is, southern England for example) by (selectively) driving house rents and prices much higher.

* To zoom up stock prices by boosting company profits compressing wages for new workers, so defined benefit pensions for older workers could be funded by stock market capital gains instead of company contributions.

Both policies relied critically on booming leverage and credit levels, which were duly delivered.

This has resulted in effect in *private* «taxation levels» that already «crush the living standards of the young», those young with lower wealth and income.
Massive immigration was the policy to boost the numbers of paying high rents and house prices with low incomes.

Mission accomplished :-).

nick

I think Chris is spot on in his analysis, but does not go far enough in his conclusions. His reasoning implies that the Government should abolish the workplace pension, and instead increase NI contributions and the state pension. All the wasteful administration costs of the workplace pension would be avoided. The only group actually benefiting from workplace pensions are Ros Altman's mates in the Pension Industry.

Blissex

«plan for pensions for the baby boomers»
«crush the living standards of the young»
«Mission accomplished :-).»

Looking from a certain altitude, all this essentially was a scheme to compel sons to provide a comfortable retirement for their mothers, *in the aggregate*.

More precisely to ensure that the sons of lower income native mothers and sons of mothers in low income countries provided a comfortable retirement to older middle and upper class women.

One of the essential aspects of this is that unlike in the past where sons supported only their own mothers in retirements, the present schemes mean that the sons of women who spent a lot of time and effort having and raising children also pay for a comfortable retirement for those women who did not invest in children.

This has given women a great incentive to have no children or fewer children: why invest all the time and effort when if you they have to support the women who did not, and if you don't do that, you still get supported by the sons of women who did make that investment?

JohnR

"I may be wrong but Job Seekers Allowance is 73.10pw and basic state pension is 119.30pw"

JSA is right.
So is the "basic" state pension.
Except: the gov decided that an income of some £166/wk is needed. So, in lieu of any other income, a state pension of £119.30/wk falls below this. So there exists "pension credit", which boosts the basic amount to the needed amount!

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