MSE News: Pensions auto-enrolment delay 'a mistake'

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  • edited 31 December 2011 at 4:53PM
    CLAPTONCLAPTON Forumite
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    edited 31 December 2011 at 4:53PM
    wozearly wrote: »
    Which would be great if NI was set aside. In reality, as its used to fund current government spending and pay for current retirees (etc) in the expectation that future generations will foot the bill on the same basis, its not clear that this would solve the problem of the baby boomer generation retirees requiring a much larger spend from future workers than is currently the case with NI.

    The shift towards having individuals provide directly towards their own pensions in ways other than NI is a very sensible move away from the reliance on future generations to pay for benefits promised to current workers.

    In fact, anything which insulates individuals financially from the whims and pressures of the government of the day is almost certainly going to be a good thing.



    The issue is this

    all pension income is provided by the economically active.

    so for any given number of pensioners and for any given level of average pensioner income, it makes vitually no difference whether the pensioner income is provide by the state or provided by 'funded' schemes

    this is because all goods and services are created by the economically active component of society; they must produce enough for themselves and all the economically inactive (i.e. children, pensioners, unemployed etc )

    the way this is done often confuses people
    but

    1. it can be done by taxation:
    workers forego some of the fruits of their labour via taxation : this however is very visable to workers and often resented, so governments are keen to reduce this

    or
    2. it can be done by 'funded' schemes: what happens here is that workers forego some of the fruits of their labour via the profits of the companies that fund the pension schemes
    this is much less visable and so government favour this approach


    however, for any given level of pensioner income exactly the same burden is placed on the workers


    so making people 'self sufficient' by having funded schemes makes no real difference to the overall burden on the working people

    basically if the working people demand a greater proportion of the fruits of their labour then other people must get less; no way round that
  • wozearlywozearly Forumite
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    CLAPTON wrote: »
    The issue is this

    all pension income is provided by the economically active.

    so making people 'self sufficient' by having funded schemes makes no real difference to the overall burden on the working people

    basically if the working people demand a greater proportion of the fruits of their labour then other people must get less; no way round that

    I think we're talking about slightly different things.

    Starting on our common ground, I agree that once someone becomes economically inactive, they no longer generate their own income, but continue to demand goods and services (even if that's only food, shelter, heat, etc).

    Society can collective provide the economically inactive with income taken from the economically active to achieve this - this is essentially how the state pension works, drawing income from the economically active and redistributing it to the inactive. The unwritten promise is that future generations will continue to do the same. The same is true of 'unfunded' pension schemes.

    Funded schemes fall into two categories. The defined payment version (e.g., traditional final salary pensions) operate much like the state pension. The scheme guarantees to pay a fixed level of benefit and then guesses (albeit using actuarial methods) what contributions are required during that person's lifetime to fund that benefit. If the guesses are too low, the scheme is obliged to make up the shortfall - be that from profits, or getting larger contributions from other economically active members.

    The defined contribution version is the safer one economically, because the payment out is directly linked to what the individual paid in and how the money performed while invested. Shortfalls are borne by the individual, not the scheme as a whole. Passing the risk onto the individual is less popular at an individual level, but bears less chance of pushing the burden of shortfalling onto future scheme members.

    One other factor is in play - if the balance between economically inactive and economically active changes so that more people are inactive, then the state pension model is forced to place an additional burden on current workers to fund the promised level of payments to retirees.

    The final salary "funded" model isn't affected if it has the right level of contributions. If its underfunded, then the burden has to be placed on the economically active.

    The defined contribution model isn't affected by this type of shift, because it doesn't make promises of a certain level of payout in advance.

    Ultimately, the point is that the overall burden is not necessarily the same. If there are more inactive people demanding the same level of income from a smaller base of workers, the burden on workers increases.


    The points that jamesd and I were making were about the change in proportions of economically active to inactive. Unless I've missed something, for your post to be true that factor has to be ignored.
  • edited 2 January 2012 at 3:30AM
    jamesdjamesd Forumite
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    edited 2 January 2012 at 3:30AM
    wozearly wrote: »
    Which would be great if NI was set aside.
    It's somewhat set aside in that it does reduce the borrowing requirement or repay national debt, so an increase in NI would effectively be putting money away for the future liability.

    One difficulty with defined contribution schemes is that they will increase the wealth spread in the economy, with more people having large assets later in life than at younger ages. There's a potential here for social disturbances if the younger portion of society doesn't appreciate that it's money saved to pay for retirement. One of the socially worthwhile aspects of pension auto-enrollment is that it can increase the number of participants looking to the future and understanding such things, potentially reducing the chance of such disturbances.

    While CLAPTON has a point, it is worth considering that prudent investing for retirement involves global investing, so it's not a zero sum game within the UK.

    There's one somewhat bogus point though, the claim that workers are forgoing some of the fruits of their labour. It's the pensioners to be and others who own the business and who are putting their capital at risk who are entitled to the fruits of the labour, not the workers. The workers are entitled to whatever a market rate is for their services, not a share in the profits of the business. Unless they are working in an employee owned business, some of which do exist. And of course most pensioners to be are actually workers themselves, so are effectively funding their own retirements with any money not distributed to the workers as well as with their own pension and other retirement capital contributions.
  • gadgetmindgadgetmind Forumite
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    CLAPTON wrote: »
    so for any given number of pensioners and for any given level of average pensioner income, it makes vitually no difference whether the pensioner income is provide by the state or provided by 'funded' schemes

    I've heard that argument made on several occasions but find the reasoning behind it unconvincing.
    this is because all goods and services are created by the economically active component of society; they must produce enough for themselves and all the economically inactive (i.e. children, pensioners, unemployed etc )

    However, those who have saved for their own retirement can reward those who provide them with future services with money. Those who haven't saved for their own retirement just sit there with their mouths open and their hands out.

    There is a huge difference between people foregoing fruits now versus expecting future generations to forego them on your behalf.

    Yes, governments are in a position to smooth things out so that each generation pays for the last, but demographics are working against them, and so is their habit of relying on massive gearing to fix the problem.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmindgadgetmind Forumite
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    jamesd wrote: »
    prudent investing for retirement involves global investing, so it's not a zero sum game within the UK.

    Absolutely. I've been export driven during my whole working life, and I mean globally not just Europe and/or US.

    My projections also show that I'll be paying more tax in retirement than I'll get in state pension. Is that being economically inactive? What if I decided to go the BTL route. Would that be economically inactive?
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • edited 3 January 2012 at 10:33AM
    CLAPTONCLAPTON Forumite
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    edited 3 January 2012 at 10:33AM
    wozearly wrote: »
    I think we're talking about slightly different things.

    Starting on our common ground, I agree that once someone becomes economically inactive, they no longer generate their own income, but continue to demand goods and services (even if that's only food, shelter, heat, etc).

    Society can collective provide the economically inactive with income taken from the economically active to achieve this - this is essentially how the state pension works, drawing income from the economically active and redistributing it to the inactive. The unwritten promise is that future generations will continue to do the same. The same is true of 'unfunded' pension schemes.

    Funded schemes fall into two categories. The defined payment version (e.g., traditional final salary pensions) operate much like the state pension. The scheme guarantees to pay a fixed level of benefit and then guesses (albeit using actuarial methods) what contributions are required during that person's lifetime to fund that benefit. If the guesses are too low, the scheme is obliged to make up the shortfall - be that from profits, or getting larger contributions from other economically active members.

    The defined contribution version is the safer one economically, because the payment out is directly linked to what the individual paid in and how the money performed while invested. Shortfalls are borne by the individual, not the scheme as a whole. Passing the risk onto the individual is less popular at an individual level, but bears less chance of pushing the burden of shortfalling onto future scheme members.

    One other factor is in play - if the balance between economically inactive and economically active changes so that more people are inactive, then the state pension model is forced to place an additional burden on current workers to fund the promised level of payments to retirees.

    The final salary "funded" model isn't affected if it has the right level of contributions. If its underfunded, then the burden has to be placed on the economically active.

    The defined contribution model isn't affected by this type of shift, because it doesn't make promises of a certain level of payout in advance.

    Ultimately, the point is that the overall burden is not necessarily the same. If there are more inactive people demanding the same level of income from a smaller base of workers, the burden on workers increases.


    The points that jamesd and I were making were about the change in proportions of economically active to inactive. Unless I've missed something, for your post to be true that factor has to be ignored.


    firstly

    the any given level of income for retired (eceonomically inactive) people the 'burden on the working (economically active) people must be the same i.e. they must give up the same level of the fruits of their labour whether the scehmes are funded or unfunded.
    On this I believe we agree

    secondly : it is true that funded schemes have the 'feature' that the level of the actual pension in retirement is a function of the market forces (stock market price levels and divided,gilt yields etc ) and government decisions (QE reduces gilt yields etc)

    so that in unfavourable times like now, the funded new pensioners get lower pensions that they might have expected
    this does indeed reduce the 'burden' on the workers but only at the cost of less for the pensioners.
    but so of course do unfunded pensioners; changes to pension age , rpi to cpi linking etc.

    so it is clear that for any aggregate level of pensioners total income whether thing are funded or unfunded makes no difference to the overall buden on the economically active. It this sense it is a zero sum game


    thirdly : the point about the changing ratio of economically active and inactive is well made;

    however this makes no difference to the aggregrate argument about the total burden but massively change the political arguement.

    Governments changing the level of state and public ) pensions causes demonstrations on the streets; the deliberate government action of reducing the gilts yield is only mentioned in the financial pages

    So yes, it is harder for government to avoid unpleasant choices if the schemes are unfunded but
    we are still left with the equation that says if the pensioners have more then the workers have less and that whether funded or unfunded, the burden is the same.


    forthly : whether 'funded' schemes increase economic growth.
    this is very difficult and I am have insufficient knowledge of economic to really say either way
    on the one hand there is a pool of investment funds available for investment; this comes at a cost of all the unproductive people working in the pension industry;
    is there really a shortage of investment capital or do the fundes simply go into increasing the share prices of established companies

    lastly
    there is the issue of personal responsibility for one's own retirement
    in principle there is a strong argument that we should all made our own provision on an individual basis

    however it seems to me that while this may suit some, this is unrealistic for the majority
  • hugheskevihugheskevi Forumite
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    forthly : whether 'funded' schemes increase economic growth.
    this is very difficult and I am have insufficient knowledge of economic to really say either way

    Economic theory generally suggests that a funded system should have higher growth than a Pay-As-You-Go system.

    However, actual outcomes in practice haven't demonstrated this theoretical difference (although of course it is always hard to control for all other things, so not absolutely definitive).
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