Last week the Bank of England was warned to prepare for a financial crisis triggered by the discovery of extraterrestrial life. But the really worrying scenario isn’t aliens. It’s us.
A century ago the state pension as we know it was introduced. Taxes from employers and their staff were used to pay out benefits to the elderly once they hit retirement age. There was no means-testing, and this benefit for all removed the stigma associated with claiming welfare. It was a roaring success. But it won’t see another 100 years.
It’s always been wrong to call it a pension. It’s a benefit paid out of current taxation like any other. There’s never been an investment pot built up or paid into. The state pension runs more like a Ponzi scheme. And that scheme was doomed as soon as Britain’s birth rate began to fall. A country of the young has become a nation of the elderly. Just 50 years ago there were around four working-age Britons for every pensioner; now it’s closer to 3.6 – and by 2070 it’s projected to be about 2.5. They won’t be able to pay enough taxes to keep this benefit going in anything like its current form.
If the Ponzi scheme nature of state pensions provided the kerosene, then the triple-lock policy was the torch that set fire to the whole thing. Guaranteeing an annual increase of whichever is highest of inflation, average earnings growth or 2.5 per cent was a Liberal Democrat manifesto commitment at the 2010 general election and adopted as coalition government policy by David Cameron a year later. It has proved disastrous.
Britain’s tax-and-spend watchdog, the Office for Budget Responsibility (OBR), says the policy is already costing three times as much as originally expected – and is on course to reach £15.5 billion a year by the end of the decade. The result is that while we’ve spent the past year debating disability and sickness benefits, the country’s largest benefit of all has gone comparatively ignored. The state pension is so expensive, in fact, that it accounts for more than 10 per cent of public spending and is the second-largest outlay after the NHS.
Whenever these hard truths are pointed out, Britain’s most powerful lobby – OAPs – sing in harmony. We’ve paid in all our lives. The answer, of course, is: you’ve paid into nothing. But their second claim – that despite all this unsustainable cost, Britain’s state pension is among the least generous in the developed world – is actually correct.
The counter to that argument should be that our private pensions system is better than most. Auto-enrolment has pulled workplace pension participation up dramatically: from roughly 42 per cent of private-sector employees 15 years ago to around 86 per cent now. But it’s still not enough.
Anyone reading this with more than a couple of decades left of their working lives can bank on not getting the state pension in its current form. Not only does the triple-lock have to go but a hike in retirement age as life expectancies increase (and, to be honest, even if they don’t) is inevitable, and probably so too is some form of means-testing. It’s imperative then that private pensions are enough to provide a comfortable retirement. Trouble is, it’s looking like they won’t be.
The inheritocracy – whereby only those with healthy accounts at the Bank of Mum and Dad have any hope of getting on the housing ladder – is a well-known phenomenon. But the same proportion of young people who say that they’ll need parental help to buy a home (20 per cent) also say they’ll need that same inheritance to provide for retirement.
It runs like a Ponzi scheme. And it was doomed as soon as Britain’s birth rate began to fall
No wonder, when evidence of a savings gap – between what people will need to fund their retirement and what they’re actually saving – is only growing. Industry research suggests as many as one in three people already have a gap of at least £100,000. Something many will never be able to fill, given that the government’s modelling reckons 43 per cent of us don’t save enough. Before the middle of this century we could be in a retirement crisis.
That will mean increased reliance on state welfare at the very time that many see that system becoming unsuitable. Worse still, it could see a return to the pensioner poverty this country has done so well to eradicate.
In the early 2000s, the average disposable income for a pensioner couple was roughly equivalent to that of a couple with children. Now it is around £5,000 higher, a gap that could rise to £7,000 by 2030, according to the Resolution Foundation.
Demographic reality can’t be ignored. We should rip up planning law and incentivise house-building, and we should do all we can to encourage parenthood. But it’s hard to see how, even in a perfect world, we’ll start having enough kids again to shore up the population pyramid’s foundations. Flooding the economy with migrant labour is a non-starter politically, and probably economically undesirable anyway, and so we have to accept that the future of Britain is one of an older population with a smaller and smaller workforce to pay for them.
That doesn’t mean there will be hordes of destitute pensioners on the street. Advances in medical and care tech mean these people will be looked after, but that care will have to be paid for. That’s why it’s more important that our private pensions do well. But in many cases they just don’t.
Some defined benefit schemes – common among many industries – have performed worse than cash savings accounts over the past few years. A near total aversion to risk has only hardened since the financial crisis. That is bad for pensioners who are missing out on serious gains, while the economy as a whole is missing out on pension fund investment firepower.
Rachel Reeves wants to change that. In her Mansion House speech last year, the Chancellor encouraged funds to get into riskier investments – though dropped a plan to force those investments to be in British companies. A wise decision given the historically poor performance of British stocks.
For some, none of this will be enough. You can means-test the state pension, raise the age threshold, scrap the guardrails and force people to save harder – and still the sums may not add up. Academics are beginning to wonder whether retirement will prove to be a 100-year anomaly rather than an established fact of life.
An elderly Scottish friend, who spent his career in factories, once told me most of his colleagues died within a year of stopping work. That future doesn’t feel quite so alien now.
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