UK State pension Ponzi scheme unravels with retirement at 70

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

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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.

Would you put your pension on a politician's promise?

Would you put your pension on a politician's promise?
Britain’s state pensions are Ponzi schemes on a scale to make the fraudster Bernard Madoff blush.

By Ian Cowie
Published: 12:17PM BST 09 Oct 2009

Comments 1 | Comment on this article

"Told you so. Sorry to start so smugly, but there really is no other way to put it. This column has often warned about the risks of savers putting their faith in politicians’ promises. Now this week’s Pensions White Paper demonstrates just how dangerous that can be in cash terms.”

That’s what I said in this space on May 27 2006, the last time millions of people’s retirement plans took a knock when politicians moved the goalposts. Back then, it was the announcement that Labour planned to scrap the earnings-related benefits of the State Second Pension, just four years after S2P had replaced the State Earnings Related Pension Scheme (Serps). This week it was the Conservative proposal to make 5.4m people work longer before they can claim state pensions of any description.


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Millions to work a year longer under Tories So this would be a good moment to set out some sad but important facts. Britain’s state pensions are Ponzi schemes on a scale that would make the fraudster Bernard Madoff blush. This week’s National Insurance Contributions (NICs), deducted from workers’ salaries, are used to pay next week’s state pensions. That kind of accounting is called fraud in the private sector – as Mr Madoff can attest – and no insurance company would be allowed to carry on in this way.

The reason is that all Ponzi schemes collapse, sooner or later, when the inflow of money from new mugs proves insufficient to honour promises issued earlier and too many people ask to be paid. That is what is happening now with Britain’s state pensions.

Nobody should be surprised. As regular readers will know, this is the point in the article where I like to quote Nye Bevan – a founder of the welfare state – who disclosed more than 50 years ago: “The great secret about the National Insurance fund is that there ain’t no fund.”

To be fair to politicians of all parties, the chart on this page shows why state pension ages must rise – even if the scheme had been properly funded. Figures from the Office for National Statistics (ONS) demonstrate that men and women are living for more than a decade longer than they did when the current retirement ages came into effect with the National Insurance Act 1946.

Looking even further back, you can see that average life expectancy has nearly doubled since Edward VII was born and the ONS stats series started in 1841. Only in the wacky world of life assurance and pensions could this remarkable improvement be regarded as a problem.

From a historical perspective, this week’s Tory proposal could even be seen as “going back to the future” because, when the Basic State Pension was introduced in 1908, the retirement age was set at 70.

Here and now, I would suggest that anybody aged under 30 today would be rash to expect to receive any state pension before they reach 70 years of age. Certainly, the proposed increase to 66 will not be the last time this carrot is shifted a little further away from the donkey’s nose.

Nor do we have to look too far into the future to see this happening. For example, from next April the NICs deducted from our salaries will cease to buy increased S2P benefits, as flagged up in this space three years ago. Thank heavens about 600,000 people contracted out of Serps and S2P to have their NICs paid into private pensions, ignoring all the actuaries’ warnings since then that we should opt back into the state scheme.

Any of us aged over 50 now can take a quarter of these contracted out pensions as tax-free cash any time we please – but it is important to beware that this threshold will be raised to 55 next April.

When I opted out of Serps more than 20 years ago, I did so on the basis that I would rather build up a pot of private property than rely on an ill-defined share of an unfunded scheme. That remains as true now as it was then.

Put another way, which would you rather have: a tax-free lump sum today or a politician’s promise tomorrow?

Pensions are not the only way
More than 2m people are thought to be older than 50 now but younger than 55 next April. We face a ticklish question that affects all our pension savings, whether they are in private sector plans, Serps or S2P. If we fail to draw tax-free cash before April 6, 2010, these funds will be locked up until we reach 55 years age – always assuming the politicians don’t move the goalposts again.

That postponement could prove very awkward if, for example, you lost your job in the meantime. And, let’s face it, there can’t be many people who are absolutely certain what they will be doing three or four years hence. So it is tantalising to know that a substantial sum of tax-free cash is available now, when you might not need it, but won’t be available in future, when you might.

The good news is that this week’s increase in individual savings account (Isa) allowances for people aged over 50 has the unintended consequence of helping us to avoid this potential cash flow crisis. The maximum was raised on October 6 to £10,200 per tax year, per person – strictly speaking, anyone who will be aged over 50 in April next year.

So a married couple who are both the right age and have not used their current Isa allowance could place up to £40,800 in the Isa tax shelter between now and April 6 2010, when the next fiscal year starts.

This provides some valuable wriggle room for people who might want to draw benefits from their pension savings while they still can, even if they have no immediate need of the cash. The improved Isa limits mean they can continue to keep the money invested in real assets – such as shares, bonds and unit or investment trusts – in the hope of preserving its purchasing power for when they actually need it.

Better still, unlike pensions, there is no need to pay tax on income received from Isas; nor any need to declare Isas in your tax returns. It also goes to show that pensions are not the only way to provide for retirement.

http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6274049/Would-you-put-your-pension-on-a-politicians-promise.html

Pensions crisis means we will all be retiring later

Pensions crisis means we will all be retiring later
The economic crisis will force people to work longer.

By Hugo Dixon, breakingviews.comLast Updated: 12:29PM BST 08 Apr 2009

Higher fiscal deficits will make generous state pensions even more unaffordable, while the fall in asset prices is hammering private pension plans. There are three ways to cope: higher taxes, poorer old people and delayed retirement. All of these will be tried. But the last is by far the best.

Even before the crisis hit, the so-called demographic time-bomb was a worry for most rich countries and some poor ones. Thanks to better health care and a sharp drop in the average number of children per family, more old people will need to be supported by fewer workers.

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In many countries, the crunch point is coming in the next few years, as the last big bulge of babies, born after the Second World War, reaches retirement age. Statisticians measure the "dependency ratio" - the number of people over 65 as a percentage of those aged 15-64. By 2030, this ratio will have increased to 33 in the US, 40 in the UK and 65 in Japan - from 19, 25 and 35 respectively in 2010, according to the United Nations.

Traditionally, families took care of their own. But in rich countries, the government is now the main pension provider. The greying of the population was always going to squeeze government budgets. But the crisis has made a tough situation even worse, as Barack Obama, Gordon Brown and their peers have engaged in fiscal stimulation in an attempt to prevent the recession turning into a slump. The International Monetary Fund expects government debt in advanced G20 countries to jump from 79pc of GDP in 2007 to 104pc in 2014. That doesn't leave much room for pension-related borrowing.

In the UK and a few other countries, private pension plans are an important source of retirement income. Pension experts have long hoped they could step in when governments ran out of funds. But the crisis has also damaged them.

Private pensions come in two types. First, there are those provided by some companies which guarantee retired people a fixed percentage of their final salaries. The companies set up pension funds, portfolios which are supposed to make sure the retirees get what they deserve. The employers are on the hook to pay the pensioners, whatever happens to the funds' value.

The market tumble means that more companies are going to be called on to top up their pension funds. These "defined benefit" schemes have been on the retreat over the past 20 years, as companies have viewed them increasingly as toxic liabilities. The crisis could prove their final death-knell.

Second, there are pensions which depend entirely on a pot of funds accumulated and invested over the years - either by the individual or with some help from the employer. Thanks to the crisis, those pots have shrunk, bringing down the size of people's future pensions.

Pension funding is a problem. But it is important not to forget the good news: people are living longer and more healthily. What's more, if they are going to live to the age of 85, do they really want to retire at the age of 65 and slump down in front of the television getting depressed and lonely for 20 years?

Far better - for them and for their children - to work a few more years, keep their minds engaged and retire with a bigger pension.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/breakingviewscom/5124777/Pensions-crisis-means-we-will-all-be-retiring-later.html