Higher taxes and longer working lives

[Mich the Tester]

You could fix it by making everyone have a personal account stat starts out with zero - gets withdrawn from untill you start paying taxes - and then slowly gets topped up by paying taxes every month, maybe you could even add voluntary topups, and then when you stop working and paying taxes you withdraw from the account what you need untill it reaches zero. Of course the account should not be allowed to go into credit again.

It makes it nice and personal and you do not burden future generations with your extravagance.

Does anyone find fault with this system?

I find no fault with your system, other than the possibility of a mendacious finance minister doing a tax raid on the funds to finance an overgrown public sector. Don't say nothing like that has happened before;

[DimPrawn]

You could fix it by making everyone have a personal account stat starts out with zero - gets withdrawn from untill you start paying taxes - and then slowly gets topped up by paying taxes every month, maybe you could even add voluntary topups, and then when you stop working and paying taxes you withdraw from the account what you need untill it reaches zero. Of course the account should not be allowed to go into credit again.

It makes it nice and personal and you do not burden future generations with your extravagance.

Does anyone find fault with this system?

Yes, you are making a big assumption that the money you pay in tax goes to pay for your pension. However the money you pay in tax is paying for all the public sector pensions, not yours. There is no money for your pension, and not likely ever to be any.

HTH

[Mich the Tester]

Yes, you are making a big assumption that the money you pay in tax goes to pay for your pension. However the money you pay in tax is paying for all the public sector pensions, not yours. There is no money for your pension, and not likely ever to be any.

HTH

No, I think he's suggesting the the system is changed so that it DOES go to paying your pension.

[SueEllen]

Does anyone find fault with this system?

The problem is if someone is prone to a genetic disease which they don't know about until they are 40 odd or know the environmental factors that mean it will express itself, then you are either putting into much money or not enough.

Or they have a freak accident where no-one is to blame i.e. sue which means they can't work for the rest of their working lives. For example I was reading a case about a woman who had 2 children and now due to injury due to child birth can't work ever as she just about can sit up, and she is in her mid-30s.

Anyway in the UK the government is in trouble on how they have speeded up equalling the retirement age between men and women. So if you are a woman aged 54 born after 6 December you are going to retire when you are 65 instead of 63.

I forgot to add the money you are paying in goes to the pensions of the people who already retired. The only way to fund your own pension would be to stop paying for these people.

[ThomasSoerensen]

No, I think he's suggesting the the system is changed so that it DOES go to paying your pension.

Yes. I meant to say that this system should be called "Every man for himself" as a reflection of how it works.

[Ignis Fatuus]

One big problem is lack of guts on the part of politicians to tackle the issue head on. Here in Holland, after long debates and campaigns and whatnot, they're changing retirement age to 66 sometime in the future. No government has the guts to just say 'starting tomorrow, state pension age will rise to 67 for all those not yet recieving a pension'. I know, it would seem unfair on some people who are hoping to retire this year. It would seem rather nasty. But in this case if you keep procrastinating the pain will be many times worse when it finally comes.

What I find particularly disappointing is that demographers have been warning European governments about this pension problem for 40 years or so; the problem has not suddenly arised as a result of the banking crisis; that's just a convenient excuse for politicians who've failed to tackle the issue, and it's brought the issue to a head, especially with the current low interest rates (which are too low and are creating even bigger problems in the medium and long term than they're supposed to solve). People are starting work later and later, living longer and longer and still hoping to retire at 65. Something has to give, and being a reasonably humane chap, I wouldn't want it to be life expectancy.

I am afraid that the situation is worse even than most of the unheeded warnings. It is not just that we are not saving enough for retirement: it is simply not possible for everyone to save enough for retirement as we may imagine it.

Retirement is essentially having saved enough money to buy from others who still have to work, all the goods and services you need to live comfortable. Changing demographics means that this is not just a race against the calendar and the banks, it is a race against other would-be retirees. There will be more and more people wanting to retire, and relatively fewer and fewer people willing to work to provide the labour that they need. So the cost will go up. It is one of those cases of rationing scarcity by price: you can't all have it, so only those who can bid more than others will get it.

That's the problem: it is not just that you have to save. You have to save more than everybody else.

Imagine, if you will, a desert island on which there are only five inhabitants—four workers and one older retired person. Each of the four workers does several odd jobs: growing various foodstuffs, building shelter, providing rudimentary medical care, and the like. The medium of exchange is coconuts. Every month, each of the four workers gives a few of his coconuts to the retiree.

One day, one of the remaining four workers turns sixty-five and decides that he, too, wishes to retire. If he does so, instead of each worker supporting 0.25 retirees, each would be supporting 0.67 retirees. Not only that, but the total GDP of the island would fall by 25%; so would per capita GDP. What do you suppose the response of the remaining three workers will be to an apparently healthy-looking colleague who demands that they support his idleness?

Let us further assume that the candidate-retiree has planned for his nonproductive years by accumulating a disproportionate number of the coconuts. In doing so, he has done nothing to increase the productivity of the island. Now that he must spend the coconuts, the island will find an increased number of them chasing 25% less goods and services. The result is a predictable bear market in coconuts and dramatically more expensive goods and services.

Worse yet, to the extent that he has planned ahead and saved, he sows social discord, for even if he himself has accumulated enough coconuts to counteract the effects of higher prices, he has raised prices for everyone else in the process.

This example was not arbitrarily chosen. The 4:1 and 3:2 ratio of workers to retirees is about what was the case in 1990 and what will be the case in 2050, respectively.

The solution, then, is for folks to retire later. We’ve already started down that road by raising the retirement age for future retirees to sixty-seven. Unfortunately, we have a ways to go. In order to keep the current worker-to-retiree ratio at 3:1, Arnott and Casscells estimate that the retirement age will gradually have to be raised to seventy-three. Of course, the government need take no action; politically, it will prove far simpler to let poor asset-class returns and low savings force older Americans to postpone their retirements. In the past few years, millions rudely awakened to the fact that they weren’t going to retire at forty. Over the next few decades, most of the remainder will discover they won’t be doing so at sixty-five, either.

That’s the bad news. The good news is that this analysis pertains only to society at large; if you’re reading this article, you are likely saving more than average. To the extent that you do, you’ll be able to retire that much earlier than seventy-three. The really good news is that your cohorts are saving so pitifully little that this will be relatively easy to do.

The above applies only to the Boomers. The X-ers, and those coming after, will have a much harder time of it. If you are currently under forty, you will shortly be traumatized by the sight of large numbers of your parents’ generation subsisting on cat food, and your generation will begin to save prodigiously. In such an environment, it will be very difficult to gain a comparative advantage over your peers.

If you want to retire early, what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.

Retirement Calculator from Hell

[DimPrawn]

No, I think he's suggesting the the system is changed so that it DOES go to paying your pension.

So who's paying for the public sector parasites already retired?

[Mich the Tester]

The problem is if someone is prone to a genetic disease which they don't know about until they are 40 odd or know the environmental factors that mean it will express itself. Then you are either putting into much money or not enough.

Or they have a freak accident where no-one is to blame i.e. sue which means they can't work for the rest of their working lives. For example I was reading a case about a woman who had 2 children and now due to injury due to child birth can't work ever as she just about can sit up, and she is in her mid-30s.

Anyway in the UK the government is in trouble on how they have speeded up equalling the retirement age between men and women. So if you are a woman aged 54 born after 6 December you are going to retire when you are 65 instead of 63.

This is the terrain of insurance, which could run parallel to the scheme. Say, 90% of your contributions go into the pension, 10% goes to the insurance premium; that ratio could actually vary according to personal circumstances and choices.

In fact, I think the entire social security system needs to be rebuilt as a personal insurance scheme, obviously with some help for those who really can't manage the contributions. I can't see the logic of, for example, unemployment benefit having the same level and terms for everybody, when it's claer that people have very different requirements and very different chances of being unemployed for some time.

[SueEllen]

This is the terrain of insurance, which could run parallel to the scheme. Say, 90% of your contributions go into the pension, 10% goes to the insurance premium; that ratio could actually vary according to personal circumstances and choices.

While the system is complex and hard to administer now the change in the system would only see one winner - the insurance industry.

Plus you would have to take health factors into account. So like with the arguments with genetic testing - if you were someone a family genetic history of alzehmiers or early onset Parkinsons then your insurance premium would be higher.

There as in my case my premium would be lower as they would expect me to drop dead before or soon after retirement.

And the UK system of unemployment benefit is a joke. The amount should be reasonable for a single person to live on and should taper the longer someone stays unemployed.

[Mich the Tester]

I am afraid that the situation is worse even than most of the unheeded warnings. It is not just that we are not saving enough for retirement: it is simply not possible for everyone to save enough for retirement as we may imagine it.

Retirement is essentially having saved enough money to buy from others who still have to work, all the goods and services you need to live comfortable. Changing demographics means that this is not just a race against the calendar and the banks, it is a race against other would-be retirees. There will be more and more people wanting to retire, and relatively fewer and fewer people willing to work to provide the labour that they need. So the cost will go up. It is one of those cases of rationing scarcity by price: you can't all have it, so only those who can bid more than others will get it.

That's the problem: it is not just that you have to save. You have to save more than everybody else.

Many good points.

However, why just raise pension age? Wouldn't it be more efficient to get more people to start working earlier, e.g. at 18 years old, and completing their education part-time?

It seems to me that the candle is burning at both ends; people are studying full time for longer, and living for longer, while spending less years working.