A LITTLE NEST EGG
The thing I love most about the internet is the fact that whatever you post is available world-wide. So there’s a public health warning with this posting, it applies specifically to UK pensioners. However, it may be that some of the core principles behind it may e applicable in other jurisdictions.
A few years ago I drove up Route 66 from LA to St Louis and in the thirteen miles of the road through the corner of Kansas I met a woman who told me about the ‘Three Great American Lies”. In truth they are universal but here they are: ‘The check’s in the post’. ‘One size fits all’. ‘I’m from the government and I’m here to help you’. It’s the last one that I am concerned with here.
60 years ago when I was a lad an enlightened Labour government took the Beveridge Report and produced a body of legislation which has become known as the Welfare State. In essence, the government assumed responsibility for providing a safety net for the poor and disadvantaged in that they would guarantee health care free at the point of delivery, sick and disablement pay and an adequate state pension. Although always flawed and under-funded this legislation, at a stroke, gave everyone true social security. The fear of the workhouse, charity and poverty to the point of starvation was removed from the population. It was, without any doubt, the most important piece of government legislation in my lifetime. Even today, American guests in particular are astounded by the generosity and efficiency of the National Health Service.
So, up to this point, the last of the Great Lies was proved untrue in at least one respect. However, time has moved on and circumstances change. Demographic change, rising standards of health care and an increase in longevity has driven the government to tinker around the edges of the WS ostensibly to ‘improve’ it but in effect to cut costs. This is too big a subject to tackle in its entirety, I shall concentrate on the provision of an adequate pension in old age.
When I left school my course was clear. I had to enter working life, keep my nose clean and accept the fact that whilst my taxes were high and my wage low, I would gain my reward in the end because I would be under the umbrella of the Welfare State. All through my life I would be cared for and in old age would get an adequate pension. Anything I could add to the state provision in the form of savings or a private pension would improve my lot. In effect, there was a social contract. Like the British Constitution, it was never written down but everyone knew it was there and it worked. In a dangerous and uncertain world it was a great comfort.
I kept my side of the bargain. By 1998 I had accumulated the necessary 42 years of continuous contributions to qualify for a full state pension In the later stages of my working life I found I could afford to start building up a small private pension fund and so I did so. Things were looking good!
Two small things happened. During the Tory period in power before 1997 a decision was taken to remove the linkage between pensions and the average industrial wage which had always been the benchmark that decided how the state pension would increase to keep pace with changes in the economy and expectations. Instead, the pension was linked to inflation. A rough measure of how this has panned out is that in the last ten years the pension has lost at least 25% of its value.
In order to make sure that nobody was actually in poverty a safety net was introduced which guaranteed that everyone would receive a minimum income. In order to qualify for this a person had to apply, disclose every aspect of their financial affairs and accept the verdict. In other words, ‘means testing’ (or ‘demeaning testing). This principle was extended to more and more benefits on the grounds that it targeted the available money at those most in need. In effect what it meant was that the average take-up of benefit was below 50% through ignorance or shame and this system needs an enormous bureaucracy to administrate it. The UK benefit system is now by far the most complicated and expensive in the world. In contrast, in what we are told is the fourth largest economy in the world we have one of the lowest state pensions. It amounts to 47% of the average industrial wage.
The government tell us that because of the growing ratio of old people to young, the pension will deteriorate further and the answer is for everyone to make private provision to supplement the state pension. This assumes of course that wage levels are high enough to support this and that people have adequate incentives to save.
Briefly, with the uncertainty of stock market prices in recent years many industrial and private pension schemes have either failed or under-performed disgracefully. Many people find that after paying in for a lifetime they have either no pension or at best, far less than they were told would be the case. The natural consequence is that the number of people making provision for old age has fallen just when the government needed it to rise.
It gets even worse. If like me you had a small pension fund, the amount you receive from this was set against your eligibility for extra benefit. In other words, if you had £10 a week private pension, your benefit dropped by a similar amount. The savings you had made did you no good.
You’re not going to believe this bit but it got even worse than this. If, like me, you were forced to finish work a year early by disability caused by 45 years of hard work and qualified for extra benefit until the private pension kicked in you were forced to activate the pension early thus losing a valuable part of your pension fund and diminishing the private pension for the rest of your life. In effect, the government forced me to do this and saved themselves £15 a week for twelve months at a cost to me of £10 a week for the rest of my life.
Great!! We have produced a system which not only robs the poorest of whatever private income they have saved for but is allowed to force early initiation for short term gain and at long term cost to the ‘recipient’. Even more important, this, plus the uncertainty in the market has destroyed public confidence in private provision. Why do the words incompetent and bastards spring to mind?
Is there an answer? Look back in history to a time when there was no provision at all. People who could afford it bought an adjoining house and the rent from this provided an income when they were unable to work. It’s a sad commentary on 60 years of ‘expert planning’ that we have been reduced to a position where this is once again the best way to provide for oneself.
The bottom line is that the lady in Kansas was perhaps right. What seemed to be Nirvana was a discontinuity. It was all a con-trick to get us to keep quiet and work for low wages. I sound bitter? Do you blame me? Take note and learn the lesson, things have not changed, self-help is still the best help. Keep away from clever ‘financial packages’ and stick to investing in something tangible like gold bars under the bed, land or property. It’s too late for me but there you have the free benefit of 60 years of experience. Take it and start saving tomorrow.
SCG/13 October 2004