The Welfare State & Bankrupt Pensions
A Masters dissertation can be a lonely task. Seemingly endless research, interviews, debates, analyses, all elegantly distilled into a concise, well-structured argument of 10,000 words.
You could see my LSE friends start to glaze over when I told them I was writing my dissertation on how 'New Financial Products' could help fix the retirement system.
Upon reflection, they also thought I was nuts to be so excited by the world of 'Pensions' and 'Retirement'.
What I discovered in my initial research alarmed me. For example, by 2042, the United States Social Security System would be paying out hundreds of billions of dollars annually, effectively bankrupting the system and, ultimately, the country.
Why wasn't anyone talking about this?
Things in the UK were not looking good then either. Trillion pound deficits and unfunded pensions promises (much like those in the United States) were looming on the horizon, and they still are now.
Don't forget the Welfare State
Before jumping to conclusions, I think it is helpful to provide a bit of context. The man whose authoritative report helped shaped the Welfare State, Beveridge envisaged a post WWII system that would provide a base standard of living for all citizens (e.g. birth of the NHS). It was also designed to perform two key functions for society:
1. Facilitate the redistribution of wealth from the rich to the poor;
2. Support the intergenerational contract between the young and the old.
Arguably, both of these components are currently broken.
Debt is future consumption brought forward, and we've consumed a lot in recent decades. Once feared, inflation is now wanted and needed to help Western Economies 'inflate' their way out of the debt overhang.
Quantitative Easing was supposed to help with this, but it now looks more and more like a large Repo with a central bank.
This, combined with a falling velocity of money, means that inflation looks ever further away. In the UK, the fall in Sterling should provide some short term inflation, but that is likely to be short-lived.
So what's to be done?
There are arguably three leavers to pull to help fix the problem:
1. Delay the age of retirement / eligibility criteria to receive a pension (reducing liabilities);
2. Don't pay as much to those in retirement (reducing liabilities);
3. Save more today (increase assets).
There is much being done today to encourage savings. At mallowstreet, we have designed a defined contribution pension scheme with a road map to encouraging employees (supported by larger employer contributions) to save more than 15% of their annual income.
Yes, this is hugely expensive as an employer, but an essential step for the private sector to take in helping to solve the pensions and savings crisis.
Additionally, a reduction in liabilities for those who've already been promised a pension is extremely difficult for individuals to accept (understandably, if regretfully) and politically impossible for the current Government to implement.
This is where the role of the welfare state should come into play:
A true redistribution of wealth would not only create a fairer society, but spread the burden of solving the pension and savings crisis across the entire population.
It is my generation that's feeling the true squeeze: funding a pensions system with today's tax dollars whilst simultaneously trying to save as much as we can for our retirement.
Oh, not to mention all that student debt, dreams of home ownership, and starting a family.
Without any action today and in the next few years, tears before bedtime are an absolute certainty. Engaging in the difficult conversations today, across the industry, will help us all to come up with the right way forward.
Pensions are complex; everyone has a self-interest, and simultaneously has something to offer to the solution.
Written by Stuart Breyer, CEO at mallowstreet.