UK State pension Ponzi scheme unravels with retirement at 70

By Ian Cowie Your Money Last updated: June 24th, 2010

69 Comments Comment on this article

Mr Duncan Smith is the latest minister charged with tackling Britain's state-funded pension system.

The great Ponzi scheme that lies behind our State pension is unravelling – as they all do eventually – because money being taken from new investors is insufficient to honour promises issued to earlier generations.

Now the new Coalition Government suggests that we should pay more into the scheme in the form of higher taxes and National Insurance Contributions (NICs) while waiting longer before we take benefits out, by working until we are 70 before we retire.

None of this should come as a surprise. It is many years since experts began pointing out that Britain’s State pension – like most of its public sector pensions – are unfunded promises which rely on NICs and taxes paid by workers this week to pay pensions to old people next week.

This financial model is so fundamentally unstable that it is illegal in the private sector. No private company or insurer would be allowed to carry on as a series of British governments have done. Hence my disrespectful but I hope helpful comparisons with the original wheeze of the American fraudster, Mr Ponzi.

ile none of this mess is the fault of the new Government, that does not mean we should uncritically accept its suggested solution to the problem. Least of all because so much of what Iain Duncan Smith, the Work and Pensions Secretary, is proposing looks identical to what the discredited previous Labour administration had announced.

For example, there is the plan for a new State pension into which all employees will begin to be auto-enrolled from 2012. You can see why socialists might say the answer to a reduction in voluntary savings is to make them compulsory. But why would Conservatives – who used to believe in individual freedom, responsibility and choice – arrive at the same conclusion?

More importantly, why should individual savers agree? Given the multiple disappointments for pension savers over the last 13 years, the new auto-enrolled pension looks horribly like a case of throwing good money after bad.

While it is true that employees who find their paypackets diminished by deductions they never asked to be made may subsequently ask to leave the scheme, the Government hopes it will get off the ground because of many people’s inertia. Just like the flakiest tick box marketing techniques that are now banned in the private sector by financial regulators. No insurer is now allowed to tell people: “You didn’t opt out, so we helped ourselves to your cash anyway.”

Longer lifespans mean we must save more and work longer or retire in poverty. You can opt out of saving but you cannot opt out of growing old. But that does not mean the Government should nationalise our savings, which is what its new auto-enrolled scheme amounts to.

A Conservative solution to the problem of inadequate saving would be to improve incentives for voluntary pension contributions. That need not involve extra costs in the form of tax breaks. For example, the Budgetproposals to give savers greater choice about how they spend pensions savings, by removing the compulsion to buy a guaranteed income for life in the form of annuitiies, will make pensions more flexible and attractive. Savers do not like being told what to do with their own money.

Pensions would be even more attractive if we knew we could get access to the money earlier in life when we needed it; perhaps to fund a business or buy a home. This flexibility already exists in America and there is no reason it could not be introduced here.

Instead, one of the last acts of the Labour government was to delay savers’ access to private sector pensions by five years; when it raised the minimum retirement age to 55. Now the new Coalition Government seems to be heading in the same direction with State pensions.

That will be very hard on many low-income, working class men who tend to die several years earlier than better-off, middle class women; to give just one extreme example of the wide gap in life expectancy recorded by the Office for National Statistics.

It is also an unfortunate reminder of the very first fraudster I met when working in the City more than 20 years ago. Peter Clowes, who was subsequently sent to jail, told me: “If only I had been given more time, I could have paid them all.” Now the Government seems to be in the same position with State pensions.