The post that dwells on the anxiety we should all be feeling about how screwed most people’s futures are.
I haven’t posted for a few weeks as I’ve been mired in revision for an upcoming exam. I’m still mired in revision, but felt I needed a break. So naturally a c. 2,500 word post about pensions was just the tonic.
I’ve been seeing a lot in the news recently about the pension crisis. News about how ill-prepared we all are for our retirements is nothing new but there seems to have been a significant uptick in the media reporting recently.
In a similar vein is the looming social care crisis, as local authorities are buckling under the strain of trying to deal with an ageing population.
Over-65s are projected to account for a quarter of all people in the UK within the next 20 years but the Institute for Fiscal Studies says that Britain is “woefully unprepared” for the challenges posed by an ageing population.
This has all lead to me feeling rather panicked about my future and the future of those around me; hardly surprising given my name. But I think we all need to be panicking.
The following is mostly based on UK media articles I’ve been reading, but I think the principles apply to pretty much any developed nation with an ageing population.
The Pension Crisis
Everyone is aware of the pension crisis but most people seem to do an excellent impression of an ostrich when it crops us.
One of the best articles I’ve read that lays bare the disaster waiting to happen, in clear, layman’s terms, is this one from Money Nest. I’m hoping it’s a dependable source as I’ve relied on it for quite a few of the stats in this post.
The State Pension problem
The State Pension was introduced in 1909 for men from age 70. It was means-tested and life expectancy at that point was 47. Now, if that’s the mean average then I imagine infant mortality is skewering the statistic. However, you get the gist: it cost a lot less to administer than these days when people routinely live into their 90s and claim the State Pension from 65.
The big problem we have now is (obviously) the ageing population. And this isn’t just an issue in terms of people claiming the State Pension for longer.
People get caught up in the dogged belief that they are paying National Insurance contributions into some sort of ring-fenced pot that directly funds their State Pension. It’s not surprising given that we are told we need 35 years of NI contributions to give us a full State Pension. The implication is that you are funding your own retirement.
In reality, State Pension payments are funded by the National Insurance payed by the current working population.
For this to be sustainable it requires 3 people working for every 1 retiree. This is the ratio we have at the moment. However, with the population ageing as it is, by 2050 there will be just 1 worker to 1 retiree.
Can you see how royally fucked we are?
Having access to a defined benefit pension is seen as absolute gold. However, for my money I wouldn’t trust their ability to pay out when the time comes.
According to the Money Nest article I cited above, in a recent study of 6,000 pension schemes, a total of at least 600 are expected to become insolvent and 1 in 6 are at risk of being bailed out by the Government’s Pension Protection Fund.
Defined contribution schemes feel safer (which may be false comfort on my part) but the problem is that they just won’t pay out enough for most people. Apparently only 50% of the population has a private pension and this drops to 18% for the self-employed.
The amounts people are putting into their pensions (when they do have a private pension) aren’t anywhere near enough for a comfortable retirement.
The well-cited rule of thumb is that you should be putting in a % of your salary representing half of your age when you start contributing to your pension. So if you are 30 when you start, you need to be putting in 15% of your salary (including employer contributions). But every pension calculator I’ve looked at suggests even that won’t be enough (although this obviously depends massively on your salary compared to your spending).
Most people say they can’t afford this level of contributions. You read the Guardian and you get the usual spiel that people are struggling to even afford food, let alone contribute to a pension. Fine, you may be right. But that won’t help when you still can’t afford food in your old age, but health prevents you working to buy it.
I don’t have solutions or helpful advice for people stuck in that situation. It’s shit. It’s shit to have to worry about something you can’t do anything about. Doesn’t mean you shouldn’t be worried. We all should be worried.
A Spineless Government
Problem is, no Government is ballsy enough to address the problem. Pensioners are a very motivated section of the voting public and attacks on the State Pension are treated with vitriol. Governments have, so far, been too nervous to even get rid of the triple-lock on the State Pension, let alone do something more drastic.
This week has seen the English courts dealing with a Judicial Review of the increase in State Pension age for women born in the 1950s (so-called “WASPI” women: Women Against State Pension Inequality). It’s not that I don’t have sympathy for the way their State Pension age was increased with little notice. But if people think that’s the worst that a Government will do in terms of springing nasty retirement surprises I think we’re all in for a shock.
I suspect that successive Governments will continue to ignore the pension crisis (both State and private) until they are forced to do something dramatic and draconian.
The other side of the ageing population problem is the increased burden on the National Health Service and local authorities, who have to cover adult social care.
A report on the BBC this week made for the usual grim reading whenever the social care crisis is discussed.
More and more people need social care, whilst local authorities have been faced with increasingly brutal cuts. A different government could reverse those cuts but that doesn’t change the fact that the money still has to come from somewhere.
In the 2017 elections, the Tory party were pretty much destroyed by a manifesto provision that meant that people receiving in-home social care would pay for it posthumously from the proceeds of sale of their home.
It was derided as a “dementia tax”. A tax on people with a degenerative illness whilst people with, say, cancer, would be treated for free on the NHS. This was despite the fact that older people that go into a residential home are already expected to sell their homes to pay for the care. All this did was equalise the position.
I don’t vote Tory, and personally I would advocate a general rise in inheritance tax rather than a “pay for what you consume” attitude to social care. But I found myself, to my surprise, thinking that the Tories were the only ones advocating something vaguely realistic in terms of dealing with the ageing population problem.
Which brings me on to…
A new way of thinking
There is just not enough money in the public kitty for funding how long people live.
We need more money. I’m ruling out borrowing more as I think the State borrows quite enough as it is. This means we need to pay more tax. But what tax and who should pay it?
Sure there’s the usual calls to tax “the rich” and companies. I (partially) disagree with the latter for reasons I won’t go into here. As to the former, I agree as a general principle but the problem is “the rich” already pay a hefty portion of the tax.
The top 1% of earners pay 25% of the income tax burden. The top 10% pay about 60% of the income tax burden. Yes, there’s always more than can be done to stamp out tax evasion and aggressive tax avoidance, but “the rich” already are paying a lot of tax.
So do we raise tax thresholds to much higher levels so we have tax brackets of 60%/70%/80% tax? It’s one option. But to my mind I’ve never understood why people are so bloody hostile to inheritance tax (IHT).
It seems to be built into the British psyche that “I’ve paid tax my whole life and now the Government wants to steal from my children on my death”.
I have two points to make on that:
The IHT threshold is currently pretty high. For a married couple, who own their own home and who do the usual thing of passing everything to the spouse on the death of the first person, the IHT threshold is, in most cases, £950,000. From next year it will be £1,000,000. Most people are going to get nowhere near it.
The “I’ve paid tax my whole life” argument doesn’t wash. I have no actual stats for this (so someone do correct me if I’m wrong) but I’m pretty sure the vast majority of people die “in debt” to the State. This is factoring in all the public services you consume your whole life, including the decades of receiving State Pension and the potentially high cost of health and social care in old age. The Daily Mail love to rip in to “benefit scroungers”. Well, most of us are benefit scroungers over the course of a lifetime when you think about it.
I think we all need to reframe how we see our assets and estates. Instead of seeing our wealth as something we build up to pass on to the next generation, I think we have no choice but to start viewing it as something that the Government allows us to hang on to during life but will retrospectively fund public services on our death. This is despite the fact that a recent survey showed millennials to be unrealistically reliant on receiving an inheritance.
We can’t have it like it was in the past. You can’t expect to retire and have 30 years of State Pension and not pay for it somehow. You can’t access social care that costs £1,000 a week without someone, somewhere having to pay for it.
Personally I’d rather them take my money from me when I’m dead rather than when I’m alive.
A word on early retirees and the pension crisis
I thought I’d finish by addressing the reason why those of us in the financial independence community still need to worry about the pension and ageing population crises. I imagine many/most of us think we are immune to the problems outlined above.
A lot of people pursuing FI aren’t reliant on the State Pension. They don’t factor it in to their calculations.
Some also aren’t reliant on a private pension (much or at all) as they don’t pay into one for fear of it being tinkered with and the date of access being pushed back.
Paying into an ISA or taxable investment account may seem like it’s safe from political tampering but who knows?
There is a huge fucking black hole in the nation’s finances. God knows what the Government of the day will do when it finally comes to swallow us all. They are going to need a lot more tax.
Just cutting/delaying future generation’s access to the State Pension won’t be enough. You could raise the State Pension age into the 80s in the hope/expectation that people will have to keep on working until then, but realistically the physical and mental limits of human endurance won’t allow it.
As I’ve outlined above, my view is that that tax should be taken in the form of greater IHT. But it’s an unpopular view and I imagine it probably wouldn’t be enough on its own anyway.
So it’s possible that the Government may seek to raise income tax instead (including on dividends). Or they’ll increase VAT and thus push up your living expenses. Tax-free savings accounts might go the way of the dodo. Hell, they might even retrospectively make a big chunk of your ISA taxable.
The impossiblity of being totally prepared for the future
The fact that you were prepared for retirement and built yourself a nice “nest egg” might go against you if the Government decides you have enough savings to raid them.
Just as being a good driver doesn’t protect you from being totalled by a bad driver, being good with your finances doesn’t mean you won’t be affected by those that did not have the will or the means to adopt the same care.
Siblings on board?
And what about caring for elderly parents? My FI projections don’t factor in any spending on my parents as they get older.
Given what I’ve said above, I’m fine with their home being used to fund any social care they need but I doubt my sister will feel the same. She’s disabled and living with my parents at the moment. I know a lot of her life goals revolve around staying in that house when my parents are gone. I’m certainly not going to make her homeless in my pursuit of FI. I know it’s a long way off but I can see us clashing in the future.
Part of the problem?
In some ways we (would-be early retirees) are part of the problem. Remember the stat earlier about how the State Pension needs 3 workers to every retiree to be sustainable. If I quit my job to live off my tax-free ISA income, I may not be an active burden on the state (and chances are I will have paid as much tax already as the average traditional retiree to justify continuing to use public services) but I’m not as useful as if I carried on working to help fund public services for others.
What am I going to do about it?
The intention of this post isn’t to give wise guidance on how to protect yourself from the pension crisis. Nor is it a clarion call for action.
I’m just worried. But I don’t think there’s much I can do about it other than carry on as I am and roll with the punches. It would still put me in a better position than most.
And sometimes at my most fretful that’s what I’ve come to see the FIRE movement being about for me. It might not end up being about retiring super early and living my ideal life. It might just be about putting myself in the least worst position for the future.
On that happy note, I’m heading back to my exam revision.