Don’t rely on the state for your retirement

15th May 2013

Alan Easter group chief executive of the Beaufort Group gives his view of the current state of retirement.

Back in the day….our parents told us to always put something aside for a rainy day. But then again, back in the day, our woods, parks and forests were full of red squirrels.

But, just like the other American disease, the grey squirrel, US funded cheap finance came to our shores and the discipline of saving was overrun but the discipline of debt.  Now the poor old Red is rare, and savings levels are at an all time low.

Much has been said about the removal of incentives to save, Life Assurance Premium Relief (LAPR) was removed as long ago as 1984, Gordon Brown raided our pension pots with a tax on dividends in is first budget in 1997, and continual change to savings accounts and products have just left confusion and disengagement from the every day saver. Even today, I read an article last week that stated that there was only one savings account that paid a level of interest above inflation.

Who can blame the everyday person from not bothering when it is far easier a process to borrow than to save?

The outcome of this change though is frightening. Employers are bewildered by legislation and cost when trying to do the best thing for their staff by having some kind of pension scheme, regular savings by individuals into some kind of long term retirement plan as a discipline has all but disappeared and many now are playing a wait and see game. The trouble is that by the time they realize that they haven’t got enough, its too late to do anything about it.

The state wont help. The new ‘flat rate’ proposals (£144 per week) bear no relation to affordability. If Her Majesty’s Government had to fund a scheme today that addressed all current and future liabilities (just like a private enterprise has to) the cost is estimated to be in excess of £5trillion! Compare this to the National Debt of £120billion and you can see the size of the problem. Both of these figures from the Office of National Statistics by the way…

This may sound blunt, but if anyone reading this thinks that this is sustainable and that state funded pension benefits will improve over time then they certainly live in a different world to me.

Debt is now the preferred behaviour for most of society; incentives to borrow are better marketed, easy to engage with, simpler and more accessible than ever before. And a Government of any colour that is seeking to stimulate the economy is not going to work too hard to change this, nor are any of them brave enough to address the issue, it would be far too politically damaging.

So, what incentives are required? I think only one.

A complete understanding that no one, not this Government, or any other, is going to help. Time spent seeking the optimal solution be that an ISA, a Pension or even a savings account is good time spent as long as it doesn’t defer the action.

The only incentive needed is an understanding that a retirement in poverty isn’t going to be a nice place to be.

11 thoughts on “Don’t rely on the state for your retirement”

  1. Paul C says:

    Hi Shaun,
    Your time today will ring a bell with the majority of employees (wage slaves). The manipulated figures tell a truth even if the margin has been massaged down, wages +0.7% versus RPI +2.5% . This is no economic recovery for the masses but obviously if you are an asset holding class then things are much rosier and frothier. This is now a year on year story and the compound nature is indeed destroying….
    The messaging from Government seeks to evade the reality for most folk and I hope there is a political voting shock next year. If I am not mistaken the past 10 years have seen “subscriber paid-up” members to either main party fall-off a cliff. The two main parties that dominate mainstream media are indeed a small group of self-interested and wealth manipulated elite.
    Economics is at the heart of the story, it is only a pity that as a science it is so maligned and impenetrable to the general public because as you point out on a daily basis it is waving BIG alert flags.
    Paul C. BSc (Econ) 1986

    1. Anonymous says:

      Hi Paul C

      In the darker days when the UK outlook was grim we wondered what would happen in better days to wages. Now we face the troubling prospect that the wage growth downtrend may be continuing into the recovery too. As ever we need more data but it poses a clear and even more worrying question for what happens at the next downturn.

      I for one hope that the more optimistic business surveys turn out to be correct. Just out of interest where did you study?

      1. Paul C says:

        Hi Shaun, I studied at the University of Southampton but note I got a 3rd! I was head of the windsurfing club and did rather too much surfing. That is why i read your blog, still trying to figure out this social science. :-)

  2. digger says:

    Shaun,

    Have you got a link for the wage data please?Can I ask viz the weekly regular pay data
    1) given the rise in self employed as a proportion of total employed,I presume they’re excluded from that average pay data?
    2) is it calculated from full time employees only?
    3) would an increase in part time employees possibly ruin any attempt at comparison?

    1. Anonymous says:

      Hi Digger

      Yes in fact all the official data I can think of on wages excludes the self employed as the annual ASHE survey and the monthly numbers do. Your other questions are answered by this bit.

      “Average Weekly Earnings for any given month is the ratio of estimated total pay for the whole economy, divided by the total number of employees.”

      Here is a link to the data

      http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/june-2014/dataset–earnings.html

  3. Anonymous says:

    I suspect the pound is too high against the Euro. The French insisted on currency union as a trade off for supporting German reunification. French citizens have held power in the organisations preventing Greek exit and/or default.

    Germany successfully carried out an internal devaluation in the previous decade – helped by strong economies internationally. Now it is obvious that many peripheral eurozone countries have an excessively strong currency, but the single currency prevents economic adjustment by exchange rate. It also makes the euro weaker, distorting Sterling, the Swiss franc etc.

    If I remember correctly, sterling fell after ERM exit leading to the mid 1990s recovery. Is the exchange rate linked to the UK’s sluggish recovery ?

    1. Anonymous says:

      Hi ExpatInBG

      I do not incline that way as for example I was reading a report that UK manufacturing costs for example had been reduced by the rising pound. But I would worry if we pushed higher again.

      As to post-1992 the day that we were forced out of the ERM is etched on my memory as the trading floor that day was a madhouse! Following the fall in the UK £ you are right to say that the UK economy picked up but I think that was because we had driven it too high via Nigel Lawsons shadowing of the Dm pushing us back above 3 Dms. Thus we were in the ERM at the wrong rate.

      But exchange rate falls do not always help as for example via the inflationary secondary effects the 2007/08 £ devaluation hindered about as much as it helped in my view.

  4. therrawbuzzin says:

    Hi Shaun, is the answer, “Fascist”?

    “Fascism operated from a Social Darwinist view of human relations. The aim was to promote superior individuals and weed out the weak In terms of economic practice, this meant promoting the interests of successful businessmen while destroying trade unions and other organizations of the working class Fascist governments encouraged the pursuit of private profit and offered many benefits to large businesses, but they demanded in return that all economic activity should serve the national interest (National Interest seems to be whatever benefits themselves)the political elite Historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because “the State pays for the blunders of private enterprise… Profit is private and individual. Loss is public and social.”

  5. Abel says:

    Morning Shaun,

    Whilst this isn’t something that would be acceptable for our political parties to say, would reducing real wages for a period of time be a bad thing for our economy overall?

    The German economy (which a large proportion of the economist community look towards as being a model to aspire to) implemented a number of labour market reforms in order to restore their competitive advantage to the rest of Europe, would falling real wages in the UK not be our version of this.

    As I understand it (although I couldn’t find the figures that I had previously seen), the level of personal wealth in Germany is amongst the lowest in Europe, and some significant distance beneath the personal wealth of the Greeks.

    Before 2007 we were seeing decling levels of manufacturing, agricultiure and other ‘real’ good production areas, and I wonder how much of this was due to wages being too high compared to other economies that we compete against – would a reduction in this real wage level not allow us to increase this sector of our economy and potentially try and rebalance (slightly) away from a completely consumer led economy which inevitably would be on the back of increased levels of household debt being taken on.

    So whilst the government of the day would never admit to wanting a lower real wage level, I have a cynical suspicion that they won’t try too hard to combat it!

    Regards,

    Abel

  6. Anonymous says:

    Hi John

    Thank you and let me explain my thinking. In essence for the vast majority of the Monetary Policy Committee the issue about rising employment is fear of wage rise pressures due to capacity constraints. But as we have higher employment and lower unemployment we have also seen a dip in wage growth. So the fear goes away for a while. Or if you want it in economics speak then the NAIRU (Non-Accelerating Inflation Rate of Unemployment) looks to be lower than previously thought.

    In addition these numbers did look rather weak even if one allows for the bonus distortions. So again an excuse not to raise base rates. Then if we factor in the strong pound £ which has pushed above Euro 1.24 today…

    That is of course assuming that the official numbers are accurate as the business surveys give a very different picture.

  7. Anonymous says:

    Hi John

    I just wanted to add this from Mark Carney at Mansion House tonight on the subject of Base Rate rises.

    “It could happen sooner than markets currently expect. ”

    Quite a change and it rather destroys Forward Guidance! More tomorrow…

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