UK - Pensioner incomes 'outstrip those of working families'

[The Don]

A recent report from the Resolution Foundation (an allegedly non-partisan think tank which is focused on improving the the standard of living of low and middle income families - so maybe more left-leaning than truly non-partisan) shows that pensioners now have, on average, a higher income than those of working age people.

They also have a lot more assets.

The cause is apparently a modest increase in pensioner income combined with lower incomes for working-age people.

http://www.bbc.co.uk/news/business-38948369

My personal view is that there are an awful lot of very poor pensioners out there. If you were unable to build up a significant private or occupational pension then you'll be struggling to make end meet on the state pension. OTOH there are also a lot of pensioners out there who are reaping the benefits of comparatively generous defined benefits pension schemes (this includes Daddy Don whose monthly income typically exceeds his monthly expenditure by a factor of 2-3) and who are also benefiting from the "triple lock" state pension.

IMO this is a significant issue, as the ratio of working age people to retired people continues to drop (and this will likely accelerate if the Brexiteers are successful in reducing net immigration) and if the UK really does have to become a low-tax, low-wage economy in order to compete on the world stage then guaranteeing a universal state pension for people who are, on average, considerably better off than those who are paying for most of it is not sustainable.

Given that there is still a major issue of poverty in old age, IMO the most likely solution would be to make the state pension means tested. Of course this will be fought tooth and nail by comfortably off middle-class pensioners who will be reluctant to have to shift from Bombay Sapphire to supermarket own-brand gin or limit their annual cruise to 2 weeks rather than the preferred three.

It's also likely that whatever restrictions come into place will be in the 15-20 year timescale (don't want to annoy the oldies mid-Brexit, after all they were in favour of it ) - which is when I'm likely to be retiring.

 

[Archie Gemmill Goal]

Not hugely surprising this. I think when my dad retired he actually ended up earning more from his pension that he did in his final job - hardly raking it in but they are fairly comfortable for their lifestyle anyway.

Add in huge house price rises, etc and the current batch of pensioners have mostly had it fairly good. Politically they have it sussed of course and no government of any colour is going to go after pensioners incomes. They have good PR in that respect - I suspect a lot of that is a hangover from the 'they fought in the war for you' generation.

Of course the average pensioner thinks nothing of crapping on everyone else to get what they want - see Brexit for evidence of that.

 

[McHrozni]

It's also likely that whatever restrictions come into place will be in the 15-20 year timescale (don't want to annoy the oldies mid-Brexit, after all they were in favour of it ) - which is when I'm likely to be retiring.

Pension systems are always fun to think about. I think that pension system should be three tiered, two provided by the state and one privately. The first tier would be universal income, granted to everyone above certain age (typically 65 years, but other possibilities are equally valid), regardless of their work history or any other concern. This income should be small, a portion of the minimum wage, and cover only the bare necessities.
The second tier should be based on your poll tax (or equivalent) payments, in a logarithmic function. The more you paid in the more you get out, but every next dollar/euro/pound/lek/... would contribute less to your pension than the previous one did. It doesn't need a specific cap.

These two incomes combined should amount to a survivable pension for someone who worked for minimum wage all his life, and livable to someone who worked for someone who made average wage all his life.

The third tier are private pension schemes, where participation should be mandatory. When you enter into workforce, you're obligated to either open an account yourself or else your employer is obligated to open one for you. A portion of the wage would be a mandatory contribution in your pension scheme, but the mandatory contribution would be tiny (i.e. 10 dollars/euros/pounds per month for full time employment, adjust for inflation yearly). The employee would always be allowed to have his employer shift more of his wage into the account.

Your thoughts?

McHrozni

 

[lionking]

Defined benefit schemes have, thankfully, been phased out in Australia. They benefitted (almost exclusively) public servants who contributed little if anything to their funds.

Retirement income will not be a problem in Australian for generations which follow me. That's because Prime Minister Keating in the mid-80s introduced compulsory employer-funded superannuation, which is now nearly 10% per annum of a person's income paid into a fund not accessible until retirement. For those with insufficient funds because they have not worked long enough to accumulate the $1m+ necessary, and for those who couldn't work, there is the Aged Pension, which is a decent safety net.

I'm in a middle category, where in the first part of my working life I didn't receive superannuation. My wife and I will receive a part-pension (and the fantastic pensioner card), topped-up by my super fund. We can decide the size of our pension, but the way things look, we can draw a decent proportion of my final salary, untaxed, from these two sources, and the fund shouldn't run out.

Needless to say, my children will have well over $1m in their funds when they retire. It is a great system.

I suppose there will always be pensioners who have incomes greater than some working people, but I would be very surprised if they did so on average. Sure, they have assets, as I do. Pretty meaningless when it's the home you live in.

 

[MikeG]

Defined benefit schemes have, thankfully, been phased out in Australia........

Here too. Almost entirely in the private sector, more slowly in the public sector.

 

[The Don]

Your thoughts?

McHrozni

IMO it would increase the overall expense of the scheme. Right now the full pension IMO doesn't represent a liveable income and those people who have earned most during their lives would be drawing the most out of the government scheme in retirement - which doesn't really address issues of pensioner poverty.

IMO there are many reasons why Daddy Don's retirement income is so much more than his retirement expenditure (including the fact that he's always been as tight as a duck's whatsit) but a significant factor is that because he and my mother always had a decent income, their house, appliances clothing and so forth have always been of a good quality requiring little in the way of maintenance or replacement.

As someone in good health who earns a decent wage, I'm not entitled to working age benefits or tax credits. I hope that I will have a decent private retirement income (with well into seven figures £ invested, if I don't then almost everyone will be screwed) then I don't see why I should be entitled to retirements benefits if that money could be better spend raising the living standards of those who earned less through their lives and/or whose personal circumstances didn't allow them to build up a nice retirement nest egg.

 

[The Don]

Needless to say, my children will have well over $1m in their funds when they retire. It is a great system.

By the time they retire $1m may not be that much - indeed it could be argued that it's not that much right now.

With annuity rates so low you need a shockingly large fund to deliver a decent retirement income. I'm aiming at £50k a year (which will be worth £30-£35k when it comes time for me to retire), index linked, as a very comfortable retirement, but that will need close to £1.5m to deliver.

 

[McHrozni]

IMO it would increase the overall expense of the scheme.

That really depends on what you're comparing it against and also how generous the first two tiers are. It will certainly be more expensive than a system with no public pension scheme (Japan, I think), it will also be cheaper than the exceedingly generous systems of the Soviet sphere of influence. It could be more expensive than the British system currently is, although triple lock ensures that will change eventually.

I wanted to know what you think of it in general - three tiered system, some guaranteed income, some income earned through paying payroll taxes (or equivalent) and the rest being up to you in the most convenient way I can imagine. Dunno, I think it's a good way to approach the problem of pensions.

McHrozni

 

[MikeG]

.....IMO the most likely solution would be to make the state pension means tested.......

Often as not this costs at least as much to administer as it saves in pension payments. As pension income is now taxable, surely, the state pension is already, in effect, means tested? Dunno.......I never take more than a passing interest in financial matters.

 

[The Don]

Often as not this costs at least as much to administer as it saves in pension payments. As pension income is now taxable, surely, the state pension is already, in effect, means tested? Dunno.......I never take more than a passing interest in financial matters.

Even at the highest marginal tax rate, the recipient is still getting 60% of their pension.

In work tax credits seemed to be a comparatively cost-effective way to administer in work benefits. Of course there's already an infrastructure for the collection of taxes via employers (and as a result the payment of tax credits). In order to be in receipt of retirement tax credits, the retired would have to submit a tax return which could be deemed an unacceptable burden.

 

[The Don]

That really depends on what you're comparing it against and also how generous the first two tiers are. It will certainly be more expensive than a system with no public pension scheme (Japan, I think), it will also be cheaper than the exceedingly generous systems of the Soviet sphere of influence. It could be more expensive than the British system currently is, although triple lock ensures that will change eventually.

I wanted to know what you think of it in general - three tiered system, some guaranteed income, some income earned through paying payroll taxes (or equivalent) and the rest being up to you in the most convenient way I can imagine. Dunno, I think it's a good way to approach the problem of pensions.

McHrozni

IMO having three sources of income in the way you suggest fails to address many of my biggest concerns

• Pensioner poverty, those who have never worked or who have worked little, will be entitled only to the first "slice" and will still be poor
• Overall expense, if people will receive more under this scheme then it will be more expensive, triple lock or no
• Millions who have no need of the money (like my father) will receive it which in turn will reduce the money available for those most in need

OTOH the Australian scheme sounds reasonable, but of course employers will bleat that it is unaffordable and in the post-Brexit world perhaps it genuinely will be.

 

[MikeG]

Even at the highest marginal tax rate, the recipient is still getting 60% of their pension.

In work tax credits seemed to be a comparatively cost-effective way to administer in work benefits. Of course there's already an infrastructure for the collection of taxes via employers (and as a result the payment of tax credits). In order to be in receipt of retirement tax credits, the retired would have to submit a tax return which could be deemed an unacceptable burden.

I'm not sure why you're mentioning tax credits (which I don't think should exist, BTW).

 

[McHrozni]

IMO having three sources of income in the way you suggest fails to address many of my biggest concerns

Pensioner poverty, those who have never worked or who have worked little, will be entitled only to the first "slice" and will still be poor
Overall expense, if people will receive more under this scheme then it will be more expensive, triple lock or no

There is no viable way to address both of these concerns at the same time. The only way to address it at all is for the second slice to be minuscule with excess money poured in into the first slice. In other words, to tax the people who work and earn money and give it to those that don't. If this were viable it would be done already.

Millions who have no need of the money (like my father) will receive it which in turn will reduce the money available for those most in need

This is the same question all over again. Some people can manage well without a state pension scheme. What you could do is guarantee the minimum pension and pay out only the difference between what somebody earns through a private pension and the minimum livable pension. That's a great way of getting a lot of people away from private pensions though, so the ill effects would be severe.

I think that state pensions should be small to encourage participation in private pension schemes. There could be extra provisions for those that didn't work for reasons beyond their control - lifelong disability, housewives etc.

OTOH the Australian scheme sounds reasonable, but of course employers will bleat that it is unaffordable and in the post-Brexit world perhaps it genuinely will be.

Australian system is very similar to what I proposed, the only difference is that it only has two segments, a state pension plus a private fund. I sliced the state pension into two parts, one fixed regardless of your income and work history and another variable, depending on your income.

It also fails to address your concerns, possibly even more so.

http://crr.bc.edu/briefs/australia’s-retirement-system-strengths-weaknesses-and-reforms-2/

McHrozni

 

[The Don]

I'm not sure why you're mentioning tax credits (which I don't think should exist, BTW).

It's an alternative way to deliver benefits administered through a system in which information about income is already collected. If there was a desire to target retirement benefits towards those that need them most, then tax credits could be a plausible way to administer them. Pensioners with low incomes would receive tax credits, bringing them up to a liveable income, those with high incomes would receive no support from the government and indeed would help to fund incomes for the poorest.

 

[MikeG]

It's an alternative way to deliver benefits administered through a system in which information about income is already collected. If there was a desire to target retirement benefits towards those that need them most, then tax credits could be a plausible way to administer them. Pensioners with low incomes would receive tax credits, bringing them up to a liveable income, those with high incomes would receive no support from the government and indeed would help to fund incomes for the poorest.

That sounds fine, but you need, in my view, to separate the pensioner from the low-paid poor. It is shameful that employers are able to pay poor wages knowing that the government will subsidise the wages with tax credits. Removing this iniquity, forcing employers to pay decent wages in the first place, would then impact the pensioner were this framework you suggest be adopted.

 

[Jack by the hedge]

One thing the linked story alludes to is the number of people still working after reaching pensionable age. That's likely to increase, and to make pensioners on average wealthier than retirees, as people choose to keep working while bits of pension from previous jobs kick in.

Now that employers can't force workers to retire at 60 or 65 like previous generations, I wonder if boomers clinging to their jobs is going to become a source of resentment like the same generation clinging to their family homes instead of downsizing.

 

[The Don]

There is no viable way to address both of these concerns at the same time. The only way to address it at all is for the second slice to be minuscule with excess money poured in into the first slice. In other words, to tax the people who work and earn money and give it to those that don't. If this were viable it would be done already.

That's exactly the way that the current UK scheme works. Taxpayers (including those who are retired) pay and recipients of state pensions (including those, like Daddy Don, who have sufficient retirement income from other sources) get the benefits.

I'm suggesting that the article indicates that there a lot of people who fall into that second category. As long at it's a significant proportion then it makes more sense IMO to direct the government money that's available to those that have the lowest retirement incomes rather than spreading it equally across all retirees.

IMO paying wealthy pensioners the state pension makes as much sense as giving every working age adult a government payment whether they are in well-paying work or not. IMO it would be better to address pensioner poverty by giving, say, the poorest 50% of pensioners £2 each than all pensioners (including those who are very comfortably off) £1 each.

MikeG has (IMO correctly) pointed out that there are costs associated with targeting benefits and it could be that there aren't enough wealthy pensioners to make targeting benefits at the least well off worthwhile, the article tends to indicate that this is not the case.

This is the same question all over again. Some people can manage well without a state pension scheme. What you could do is guarantee the minimum pension and pay out only the difference between what somebody earns through a private pension and the minimum livable pension. That's a great way of getting a lot of people away from private pensions though, so the ill effects would be severe.

I think that state pensions should be small to encourage participation in private pension schemes. There could be extra provisions for those that didn't work for reasons beyond their control - lifelong disability, housewives etc.

AFAIK, participation in private pension schemes is mandatory in Australia and as an employer in the UK I have to offer all employees a workplace pension scheme. This is a comparatively new situation and it also fails to address the poor value that defined contributions schemes seem to deliver in the UK but that's off topic.

There's only a disincentive to pay into a pension scheme if you "lose" 100% of the benefits but if being a member is mandatory then the disincentive is taken away. Of course there are reasons for an individual not to contribute beyond the legal minimum but there are tax benefits for doing so in the UK.

Australian system is very similar to what I proposed, the only difference is that it only has two segments, a state pension plus a private fund. I sliced the state pension into two parts, one fixed regardless of your income and work history and another variable, depending on your income.

It also fails to address your concerns, possibly even more so.

http://crr.bc.edu/briefs/australia’s-retirement-system-strengths-weaknesses-and-reforms-2/

McHrozni

I disagree. Because the government scheme is means tested, those who are in most need are likely to receive the greatest share of the money available.

Because employment pensions are mandatory, and because by UK standards the employer contributions are large, there's a great chance that those who have worked for their entire lives won't have to rely on the government scheme at all.

The major criticisms of the Australian system as described in the link you provided are:

• That it is possible to "game" the system by retiring early on superannuation and then claim more later on from the government scheme. Sounds like that could be addressed by synchronising the retirement ages
• That low levels of financial literacy mean that individuals find it difficult to manage their savings - any scheme which relies on a private element will experience this
• That annuity levels are low - again this will be an issue with any system in which annuities are required - I cannot see how they can be avoided and provide a guaranteed retirement income

The more I read of the Australian system the more sensible it looks. Government money is directed to those who need it most whilst those who are in work are obliged to have a superannuation scheme, largely funded by their employer.

 

[McHrozni]

IMO paying wealthy pensioners the state pension makes as much sense as giving every working age adult a government payment whether they are in well-paying work or not. IMO it would be better to address pensioner poverty by giving, say, the poorest 50% of pensioners £2 each than all pensioners (including those who are very comfortably off) £1 each.

Perhaps. The issue then becomes why do only the ones who don't pay the taxes (or equivalent) entitled to benefits? You need to pay pensions to the wealthy in order to stimulate the creation of private pensions in the first place. The plan is then to reduce the benefits to the wealthy by a steeply progressive tax scheme (or equivalent) to make more money available to the poor.

Yes, this still means substantial amounts of money will flow to people who don't need it. That's the price for having the money in the first place. Our entire economic system works that way.

There's only a disincentive to pay into a pension scheme if you "lose" 100% of the benefits but if being a member is mandatory then the disincentive is taken away. Of course there are reasons for an individual not to contribute beyond the legal minimum but there are tax benefits for doing so in the UK.

Maybe. There is one thing you need to remember about private schemes though. There is a possibility of losing 100% of the benefits, if your pension scheme goes bust.

My personal solution is to pay in two different pension schemes of two providers. Not optimal, I know, but it's nigh-on impossible I'll be left without anything 30 years or so from now when this will become relevant.

I disagree. Because the government scheme is means tested, those who are in most need are likely to receive the greatest share of the money available.

How does this "tested" work exactly?

The more I read of the Australian system the more sensible it looks. Government money is directed to those who need it most whilst those who are in work are obliged to have a superannuation scheme, largely funded by their employer.

Funded by their employer is a lie. There is no difference for the employer whether he has to pay you a wage, insurance or pay into your pension scheme. Money is money.

McHrozni

 

[The Don]

Perhaps. The issue then becomes why do only the ones who don't pay the taxes (or equivalent) entitled to benefits? You need to pay pensions to the wealthy in order to stimulate the creation of private pensions in the first place. The plan is then to reduce the benefits to the wealthy by a steeply progressive tax scheme (or equivalent) to make more money available to the poor.

Yes, this still means substantial amounts of money will flow to people who don't need it. That's the price for having the money in the first place. Our entire economic system works that way.

I don't understand why you *have* to pay state pensions to the wealthy to stimulate the creation of private pensions. You don't have to pay in work benefits to people who earn well in order to stimulate the creation of well paying jobs.

Maybe. There is one thing you need to remember about private schemes though. There is a possibility of losing 100% of the benefits, if your pension scheme goes bust.

I'm not sure what you mean by "pension scheme going bust". Here in the UK there is protection for company schemes, you won't get what you put in but you will get a high percentage back.

If you mean that you have invested in a fund or set of funds all of which go bust then I suppose this could happen (but AFAIK I've never heard of it).

My personal solution is to pay in two different pension schemes of two providers. Not optimal, I know, but it's nigh-on impossible I'll be left without anything 30 years or so from now when this will become relevant.

Diversification is always sensible IMO. My pension pot is spread across nine funds from six different suppliers.

How does this "tested" work exactly?

Means testing can be done based on your net worth, your income, or a combination of the two. For example entitlement to subsidised personal care is dependent on your assets (if you have more than £xk then you'll have to pay for it yourself), I'd think that the means testing for pensions benefits would be done based on income (which may or may not include "draw down" from asset funds).

Funded by their employer is a lie. There is no difference for the employer whether he has to pay you a wage, insurance or pay into your pension scheme. Money is money.

McHrozni

There's a major difference to the employer, not least from an accounting perspective. You're correct that the "total cost of employment" is key and that higher pension contributions may result in lower wages but that didn't seem to be the case in Australia. At least by making it the employers' obligation the contributions will be made as opposed to leaving it to the employees.

 

[Worm]

Means testing can be done based on your net worth, your income, or a combination of the two. For example entitlement to subsidised personal care is dependent on your assets (if you have more than £xk then you'll have to pay for it yourself).

Just an aside to note that that isn't UK-wide. In Scotland all personal care is free, to everyone 65 and over, funded by the government.

It shouldn't be (IMO), but that's the way it is.