I heard just now, on Smooooth Radio that more Scots now want independence than there are those who want to remain part of the UK. Notwithstanding that, yesterday, I mentioned the political, financial or regulatory pressures on pensions. The reality is, whichever government holds power, the situation concerning state or unfunded pensions is pretty much the same and no amount of lobbying or legal action is going to change that.
Although, even as late as last week, the detail about the new state pension is still emerging, we can be relatively certain that most of the electorate is going to have a new, generous flat-rate state pension which will pay out £144-a-week - if you have paid 35 years of National Insurance Contributions (NIC). We can thank the Liberal Democrats for that, you either think it's a good thing or you don't. However, today’s 20 and 30-somethings will have to wait until they're 70 to receive it. But, when we talk about the state pension not being around or whenever we talk about party 'x' or party 'a' jeapordising it and rendering it ‘extinct’, we are referring to depleting the ‘National Insurance Fund’.
We all probably know that NIC are paid and then passed on to today’s pensioners as state pension and any surplus goes into the NI fund; effectively, we pay for the pensions of our parents and so too, will our pensions be paid for by our kids (huh). It isn't a fund as such, it's just one big debit ledger which juggles expenses and future commitments. But although the fund is hypothetical, the Government Actuarial Department (GAD) continues to calculate any surplus within it. The problem is, the difference between the money paid in and the money paid out is shrinking fast.
The fund health is calculated every 5 years, most recently as a couple of months ago, with reference to back testing against the previous 5 years. In 2010 GAD reported that the NI fund had asurplus of £45 billions which it projected would increase to £103 billions in 2013. It got it wrong. The most recent report calculated it to be just £29 billions. When/if it goes, the state pension and any unfunded pensions will have to be found from somewhere, scrambling around the state sofa for loose change, etc. The situation isn't that precarious, just yet. Optimistic predictions by GAD show the NI fund will rise until 2036, and at that point.. it'll then collapse.
https://www.gov.uk/government/upload..._July_2014.pdf
The problem is, GAD has to rely on growth figures provided to it to work with - for instance, it has to assume that earnings growth will be 2.4% a year (ha). But if you refer to the period covered by that report (2008 to 2013) wage growth was minus 1.8% in real terms and since then, just 2.2% per annum. So, when Labour politicians talk about growing the economy, although they may not have the same motivation that I think they should have, the reality is, we NEED growth to grow and generate the NI fund. It's that growth which will fund our pensions, not whether or not the Scots vote for some bloke with a chip on his shoulder.. that's just a red herring, and he's nothing more than a legislator, a politician. I don't know about you, but I tended not to trust those people who wanted to be prefects or head boy either. He won't be able to magic money out of thin air.
I read back through various financial books and in the most prescient ones, authors have been predicting the demise of the state pension since the 80s, but as long as we had a large number of older people with a high probability to vote I doubt that would ever happen. It's all changing now, in 5-10 years, the legions of cruise enjoying, blue collar final salary gas board workers are going to start pegging it in largish numbers and so their input won't matter so much. I really feel for generation Y. My kids will all be impacted and I feel almost guilty to be part of it; complacency and lack of awareness in many people is palpable. Most recently, 10-12 years ago when the word 'debt' was replaced by the far hipper 'credit' and Tony Blair (GQ Philanthropist of the year - really)? dropped rates to practically zero and we all hocked our homes for a new TV - to fund his and Gordon Brown's self indulgent, self referencing insane political and social vote winning odyssey.
We have all read of the campaigning and the uncertainty surrpounding increases to, for instance, AFPS. The above scenario looks grim, but it can change - and quite quickly. We simply have to start increasing taxes (quickly) to pay for it. If we take ONS data at face value, the rate of increase of liabilities is £640 billions per annum and total tax revenue is running at somewhere near £600 billions. So, we make pension payouts more miserly, we continue to increase retirement age, we increase NI contributions, we remove guarantees on SERPs, we introduce yet more tax raids or restrictions on savings and assets, we introduce means testing - lets not forget either, Putin actually confiscated pensions.
Russian Pensions Paid for Putin's Crimea Grab - Bloomberg View
Public sector pension liabilities have jumped from £770 billions to £1.7 trillions in just 5 years, according to figures from Treasury accounts. Peter Tompkins, Fellow of the Institute of Actuaries and chairman of the non-governmental Public Sector Pensions Commission (and therefore, not someone you'd immediately think of as being so irresponsible to be arrested at half past three one morning chained to a lamppost and with his trousers down around his ankles) calculated the liability would rise in very short order to £1.3 trillions. This is one of the reasons why I think the cost cap on AFPS is unsustainable in the short term.
But, seeing that this thread IS about Scotland, if the young taxpayers up there are going to be funding an ageing population's free prescriptions, TV licences and heating allowances and if free tertiary education has to be funded.. all against a backdrop of uncertain oil revenue, then unless you know where the money for the state and occupational pensions are going to come from, then you really are taking a big gamble. If we assume, and it is generally accepted, that the cost of looking after all of our disgracefully and gently ageing Lightning AND Phantom pilots (Courtney excepted, as he slips into cognac induced reverie and won't care too much either way - chapeau, Courtney - apologies, I still think Cauliflower au Gratin is a Parisian railway station) is going to double as a proportion of GDP by 2025, then the impact will be more keenly felt, surely, north of the border where the state commitment is that much greater.
The middle-aged and middle classes are already struggling with uni debt, unaffordable housing and fragmented careers, military partners are finding it increasingly difficult to get work, let alone save for their own retirement which may provide resilience. On the basis of that cash flow modelling, and it could change either way still, and it will, as the flow ebbs and flows, we can kiss goodbye to any meaningful state pension benefit for anyone currently less than 32-35 years old or so. Unless something changes, unless something gives. I suppose, the reality is, if you want independence in Scotland, don't vote for it because some toe rag legislator who wasn't good enough to get a proper job tells you it's a good idea.
Finally, the story about how the Czechs and Slovaks oversaw the separation of the Koruna offers a useful signpost.
Last edited by Al R; 7th Sep 2014 at 08:42.
Reason: Putin link