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The so-called Pension Crisis

The government has recently picked up on what the rest of us have known for a while. People aren't saving enough for retirement.

The thing is, it's true. But it's not the crisis we are led to believe it is. It isn't a matter of inadequate saving. It's more likely insufficient work.

The government say we have to do one of three things, higher taxes, more saving, or working longer.


I don't think two of these solutions work.

If we all pay more tax there's no guarantee the government won't just spend it on something else. After all that's what they do with our current contributions. Part of the NI you pay is supposed to be for your state pension but the government don't save this, they spend it all.

If we all save more, say 5% of our income, that's a sudden 5% drop in purchasing that will throw the economy into recession. In addition it doesn't create the extra wealth needed to fund future pensions. The thing is that no matter what each of us save it has to be paid out of future pounds, essentially your money is invested in an economy and that economy has to have workers in order to have production. If there is no underlying economy to make the payment then the pounds are worthless. There has to be a workforce generating enough goods and services to pay for themselves and leave something over to pay pensions.

When pensions started up there were very few retirees per worker and what retirees there were used to do the honourable thing and drop dead after a few years. So it didn't cost very much per worker. Suppose workers worked for 40 years and lived for 5 years into retirement. That's one retiree for every 8 workers on average. And the pension was bugger all so it didn't cost much per worker. Now there are many more retirees per worker and it's only going to get worse. In addition people are living longer so pensions have to be paid out for up to 30 years instead of a few years.

These days most people probably expect to retire at 60 and live for 20 years. So that's 35 years work and 20 years pension. So now the ratio is 1.75 workers for every pensioner. A huge change that the system just wasn't designed to cope with.

So really the only practical way to fund pensions is for people to work longer. And not just a couple of years longer, but maybe 10 years longer, maybe more.

UPDATE. Well it's started. All sorts of employers are trying to increase retirement ages and the workers, predictably enough, are resisting.




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Pensions are just saving in a particular tax wrapper. There have been many changes in recent years and they are now worth considering as an alternative to dividends in order to avoid the dividend tax. Your money is locked up until you reach 55 though.
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