Pensions – Do we laugh or do we cry?

You may already know of my view that our global economy is much more broken than most pundits will tell you. Maybe you are also familiar with the standard first reaction to a bereavement, which is denial. Let’s put those things together; the world economy has died and denial is rife. Today’s economics reports included the credit agency S&P describing Greece as already in default – a downgrade that, if repeated by other agencies, would force central banks into an acknowledgement they are desperately avoiding.

There is a reality gap right now. My sense is that while the denial is breaking down gradually among pundits and politicos, Joe Public already knows. I heard recently that many families are not booking any kind of holiday this summer. The recession is biting a lot of us hard.

All over, people are resisting. The Greeks are the most talked about but while the Spaniards are off the streets they are still protesting the austerity plans. Spain’s potential debt exposure is twice that of (Greece + Portugal + Ireland). Meanwhile here in the UK we may be accepting the austerity in theory, but major strikes are planned over pensions. And here we find a great illustration of how our economic canoe is genuinely in the “up creek, no paddle” scenario.

Let’s look at pensions simplistically. Let’s assume I have a 40-year working life and a 20-year retirement. At the same spending level, that would mean I need to put by half of my income during those 40 years to fund my old age. Fortunately, most people need less to live on when retired, being past the time of acquisition and child-rearing. So If I can reduce my average outgoings by the time I retire to an average of half those that applied while I worked I only need half that much. But that is still a quarter of my lifetime income. That is, I would need to create and save a surplus equivalent to a quarter of my outgoings throughout my working life in order to fund my pension fully. The reality is that few of us could do even that, and fewer of us do so.

In the past, this gap has meant 1) that many pensioners live on a basic pension plus social security and 2) that the funding for pensioners is carried by the generation that is still in work. Because of the baby boom (lots of working payers in to the system) and because of the expected life-span for their parents and grandparents and because of economic growth, our society has been able to carry that burden. The future looks rather different. The boomers will become the pensioners, supported by lower numbers in the working population. That population which grew up in a strong acquisitive Orange (or weaker Blue duty) culture may be less willing to carry that burden. Indeed many have needed their parents to support them and may not be expecting or well prepared for that relationship to switch around. Compounding the problem, the elder population to be supported is living longer and with progressively greater need of support because life-span increase is outpacing health-span increase. New government reports in the past week have illustrated the problems over funding elder care. The suggestion that there should be a “cap” on maximum spending addresses fairness issues but would require a similar amount of government funding to that which they are currently attempting to claw back in public sector pensions contributions. The money isn’t there.

Some people have been helped by company pension schemes in larger companies. Governments may support these by allowing contributions to come out of pre-tax income. That may make 5% or 10% of your wage worth 7% or 14% compared with your take-home pay. But it still is not 25%. In the public sector the government has been committed to funding employee pensions, often offering sweeter deals in the past to compensate for low wages. They are now seeing that policy as unaffordable.

The only way that this system could ever have worked is through growth of investments. Intentions that money put by early in an employee’s life would grow so as to fund their retirement rely on the assumption that over the decades, investments can beat inflation. During years of growth that can work to a degree. But there is no guarantee of this, and a major recession (even worse a double-dip) will make a serious mess of such plans.
Ultimately the belief that this growth mechanism will always work has aspects of “free lunch” thinking. Many people on retirement annuities or approaching retirement age are already finding this out the hard way. Even before the crunch many people were concerned that the money theoretically “put by” in the US Social Security pot has actually been borrowed and spent. Similarly, the UK Public sector shortfall is now believed to approach £1 trillion. A recent report by accountants KPMG stated that one-third of the UK’s top 100 companies cannot currently fund their pension commitments and require remedial action.

Regardless, we are experiencing something more than mere recession. There is a long-scale economic wave called the Kondratieff cycle which lasts about 70 years. This is the fourth such cycle and we should have been in the last “winter” phase of it for a while now. The cycle reflects the way in which Orange values drive economic reality. In winter, the economic curve is downwards, a decade of contraction, not growth. We have seemed to avoid this because both governments and banks have repeatedly created new money. But this is like turning on a massive heater – it merely delays the winter, it doesn’t stop it coming – and then you have the electricity bill to cover. So the idea that you might turn even a 10% working lifetime pensions contribution into a 25% pensions income is pure fantasy. There are no free lunches and even meals on wheels have been axed.

I never wanted to retire anyway, so I had better pray to stay healthful since my pension pot is pitiful. Meanwhile I invest in the building a career for the next portion of my life. I recommend that you might look at how you prepare for your future. If you already have a pension plan, its value is likely to drop. If you haven’t, then don’t count on the government, or anyone else, supporting you beyond subsistence level. And when you watch the strikes and the marches over the coming months, even if you feel some sympathy for those who are grieving over broken promises, or even if you are one of them, don’t be in denial. Whether it makes you laugh or cry, the old attitudes are worthless; the Orange system is dead and the Green responses, which include state pensions, are inadequate. Let’s start looking at the new ways of thinking and build the money systems that we will need in second tier.

The above analysis is drawn from my book “Future Money; how we survive global bankruptcy” which can be downloaded from, or in Kindle version from Amazon.

“Today the largest volume of money by far is changing hands in what is best described as the “gambling economy… for example the volume of trade on the world’s foreign exchange markets in just one week exceeds the volume of world trade in real goods and services in an entire year.”

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorises it and a moral code that glorifies it”.
Frederic Bastiat 1701-1850

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