State Pension Affordability

[Protagoras]

There's an ongoing debate about the affordability of state pension, so just out of curiosity I was looking at the value of my state pension (due in a few years) vs the employee contributions made. There were a number of student years where I made no contribution and received credits.

At a discount rate of 5% (roughly the long term UK interest rate) the PV of employee contributions at state pension age will only be £170.4k. With full state pension entitlement I reckon I need to reach about 80 to break even on the employee NI payments.

Now I realise that this is a sample of one, but given that I've not included employer contributions this hardly looks unaffordable to the treasury if NI contributions had been invested. Ah, but they're not invested, they're treated as current revenue, aren't they?

[NotAllThere]

You'll love this. As a British citizen living abroad, I only had (it's changed now) to make class 2 contributions. About £200 a year, to keep my full contributions. Now it's about £1000, as the government changed the rules so it must be class 3. We've kept up our contributions, so when we retire, we'll both get full pension. By 70, I should be getting more out than I put in.

In another country, the amount of pension isn't only based on number of contributions, but how much. I'd recommend the UK try it.

[ladymuck]

The UK state pension is a classic Ponzi scheme with the people currently paying in funding the drawings the retirees take out.

There's lots that could have been done, like set up a sovereign wealth fund when oil was discovered in the north sea, for instance, but such forward thinking has never been a feature of the UK government (regardless of which badge it wears).

[malvolio]

All I know is that I take the old state pension and a private one roughly of the same gross value. Paying for the latter as an annuity takes the return on a sum rather more than my NICs paid in over my working career.

OTOH I have second small private pension scheme out of a £3k payment taken out under the old Section 226 scheme many years ago that I had forgotten about, where the supplier is paying me a couple of hundred pounds a month for ever (as far as I'm concerned anyway) out of a fund worth barely five figures.

Luckily for us both, SWMBO benefits from a sensible pension paid for out of the old final salary scheme from her near 40 years' in the NHS. So for now we can live comfortably, if not lavishly.

And while there is a very strong argument for setting the pension and the tax free allowance at the lowest of the various Minimum Living Wage figures, it is simply unaffordable in the current economic model - which isn't about to change, sadly.

[Protagoras]

Closing a Ponzi scheme is expensive in the short run, but I think that in order to ensure a state pension for future generations, this is going to have to be tackled at some point.

I think it's truly bonkers to have the state pension higher than the personal allowance. That's got to be costing a fortune in pointless admin adding to HMRC's workload. I think ideally state pension should equal NMW and both should be somewhat under the personal allowance - even if that means higher marginal tax rates beyond that.

The Dutch system looks to be a good model and one in which the basic state pension pays out around NMW and is based on residency. The idea is that this is supplemented by occupational and private pension savings. Monthly state pension there is about €1.7k for a single person and €1.2k each for a couple and is adjusted bi-annually. That said, the basic state pension is still funded by current revenues.

On a personal note, it was only contracting that makes retirement attainable. No way could I have saved as much working as an ordinary employee especially with the state pension age increase and so-called 'fiscal drag'. But I suppose I was in the fortunate position of having lowish outgoings so I could afford to pay into pension and take less income.

[Smartie]

The triple lock is unsustainable, but it seems even Reform have succumbed to the electoral logic of retaining it to have a chance of forming a government.

It was originally introduced to tackle pensioner poverty and has been pretty successful in ratcheting up pensions vs. average earnings.
There are clearly problems with it though - recently we had very high inflation and pensions went up by inflation. The following year, inflation dropped but wages increased to compensate for last year's inflation. Pensions went up by average income. Two bites of the same cherry.

If you're on an average wage with full working life in the UK, you can expect to pay maybe £170k in lifetime NI (inflation adjusted). You can expect to receive around £250k in lifetime state pension income.

There's already a safety net for low income pensioners with pension credit etc. so it's hard (impossible) to justify continuing this ratchet for everyone.

The state pension should be set as a percentage of average income - say 30-35% or whatever is affordable and maintained there, removing the triple lock entirely.

Our state pension system is predicated on it being supplemented by private pension provision. If we want the more generous European model we should have been paying a lot more tax over our working lives.
The Australian superannuation scheme is worth a look, though that relies on a significant (12%) mandatory contribution to worker pensions. It started at 3% however, so there's room for adjustment in the UK minimum contribution, though the effect on jobs might be problematic.

Overall, the problem like many political issues is the voters. Low tax for me, high tax for others, state pension for me, not for the kids, not in my back yard etc.
We get the politicians we deserve. If we accepted hard choices as a nation, politicians would find it a lot easier to do what's needed for the long term interests of the country.

[malvolio]

The triple lock would work, if the measurement period was extended over a couple of years to lose short term peaks...

What does irritate (a lot does these days!) is that paying in to the system and supporting the country for many years and expecting some kind of return when you retire is seen by a lot of people as you taking away something when you should be selling your house and moving into a one-bed flat somewhere...

[willendure]

The UK state pension is a classic Ponzi scheme with the people currently paying in funding the drawings the retirees take out.

There's lots that could have been done, like set up a sovereign wealth fund when oil was discovered in the north sea, for instance, but such forward thinking has never been a feature of the UK government (regardless of which badge it wears).

And with shrinking demographics combined with increasing lifespan the number putting in is shrinking while the number taking out is growing. So that explains why we allow immigration on the scale that we do.

[Protagoras]

And with shrinking demographics combined with increasing lifespan the number putting in is shrinking while the number taking out is growing. So that explains why we allow immigration on the scale that we do.

This kicks the can down the road and doesn't fix the problem. Ponzi schemes don't get fixed by adding new participants. It also creates more demand for services that the country is unable to provide. It’s unsustainable and environmentally irresponsible. We need to reduce the population while increasing productivity.

What does irritate (a lot does these days!) is that paying in to the system and supporting the country for many years and expecting some kind of return when you retire is seen by a lot of people as you taking away something when you should be selling your house and moving into a one-bed flat somewhere...

The proposition of the state pension is that one makes contributions and in return gets a state pension. In this context, it’s hardly surprising that people expect their state pension. Further, anyone planning retirement will be factoring state pension into their retirement income model.
Some suggest that state pension is a ‘benefit’; it’s clearly not since (a) the payment is related to input years and (b) actual benefits are tax free.

I do think that there’s a need for a government backed equity release scheme deferring taxes – especially council tax - to be paid from the residual on sale of one’s house.

[tazdevil]

We need to reduce the population while increasing productivity.

Yes, however we have leaders who don't have the ability or foresight to do this. Instead they're increasing the population and driving down productivity through misplaced and inappropriate policies.

Impoverishment is coming to the UK as with most Western societies and our response is to fight over the remaining scraps of wealth when we should be rebuilding our industrial capacity and expecting net contribution from people rather than net consumption.