FOOL'S EYE VIEW
Avoid The Pension Timebomb

By James Carlisle
September 25, 2002

There has been much talk recently of the 'pension timebomb'. Broadly speaking, it goes like this -- people are living longer, so the proportion of old people to young people is increasing and taxes raised from the younger people in work is going to be increasingly insufficient to keep the old folk in a comfortable retirement.

One solution is for young workers to be encouraged, or even forced, to build up personal pensions for themselves. But to pull a big enough pot together by the normal retirement age means starting very young and saving very hard. Most people aren't doing nearly enough at the moment.

The decreasing work to play ratio

The root of the problem is that people are expecting to work for a smaller and smaller proportion of their lifetime. A few decades ago, a typical man might start work at 16 before retiring at 65 and living until his early seventies, giving a 'work to play ratio' of around 68%.

Nowadays, a typical man might have a year off and then play around at University for a few years before starting work at about 22. That might be followed by retirement at 65 (although most people seem to think they'll retire sooner than this) and a life expectancy from retirement into their early eighties. All this adds up to a 'work to play ratio' of more like 52%.

Increasing productivity

The only way that this can work is if people are more productive when they're in work and, crucially, are also prepared to save the extra gains of their productivity for the future. No doubt not everyone wastes their university years in the pub and we are, as a nation, undoubtedly becoming more productive. But I see little sign of people being prepared to save their 'extra earnings' for the future (or to pay for an increasing retired population). Instead of going into a pension or an ISA, more often than not, people seem to spend the money on improving their current lifestyle rather than worrying too much about the future.

Increasing the retirement age

The only other option is to for us all to work for longer and get our 'work to play ratio' back up into the 60-70% range. This has been the conclusion reached by many recently and various countries, including the USA, Australia, Germany and Italy, have plans to increase their State Pension Age (SPA). The Pensions Policy Institute (PPI) threw its hat into the ring last week with a paper called "Raising State Pension Age: Are We Ready?" (220kb pdf)

Not surprisingly, the PPI concluded that a significant hike in the State Retirement Age is overdue and they reckon that a gradual increase to around the 72-75 mark is probably in order, with more to follow assuming that longevity continues to increase. Most interestingly, though, they said that a side benefit of increasing the SPA would be to give a strong signal to today's younger workers that they should be prepared to work for longer. It might also prompt company pension schemes to increase their pension age.

But there have to be enough jobs

While it's easy to talk of people working until they're 75, it does seem a little way removed from the current reality. Already there seems to be considerable discrimination against older people in the jobs market and it's no good going on about late retirement if employers aren't going to give jobs to the late retirers. Even if these concerns are taken on board by employers, there actually has to be the work for people to do. Without a substantial increase in the country's output, there just won't be enough jobs to go round. You can't simply wave a magic wand and produce a few million more jobs just like that. The right economics need to be in place and that, of course is a far tougher nut to crack.

While we let the policymakers worry about this (putting in a vote every few years of course), at an individual level the answer is very clear. We can't rely on being employed into our seventies (even if we'd be happy to be) and we can't rely on getting much help from the State. If we want to avoid the 'pension timebomb', then we need to be saving much more of what we're earning right now.

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