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Will your pension be enough for a comfortable future?

PENSIONS ARE a big issue in the UK, not least because it is an ageing population. As a growing proportion of the population gets older, a rising number of people will depend on their pensions to live on in their retirement. But will it be enough?

The evidence overwhelmingly says no. That means the social security system has to step in and help out, which means higher taxes and more social strain for millions of people. But there will be huge strain on this system in the years ahead.

It is expected that almost one in three adults in the UK will be aged 65 or over by 2050, compared with around 20 per cent, or one in five, in 2007.

Moreover, estimates from the Joseph Rowntree Foundation show that as many as 2.2 million, or roughly one-fifth of pensioners in the UK, live in poor income households – or income poverty.

Worryingly, a disproportionate numbers of working-age adults from minority ethnic groups enter old age with incomes below 60 per cent of the median.

It starts early, as they “also experience a higher prevalence of child deprivation”, and continues into old age.

The Joseph Rowntree Foundation’s Poverty and Social Exclusion (PSE) Survey revealed that 14 per cent of ‘white’ children lacked two items that the majority of the population believe to be necessities, compared with 35 per cent of ‘non-white’ children. More than half from the latter group lacked at least one item deemed to be a ‘necessity’.

Of course, this is not a uniform outcome, there are wealthier BAME households but, as a broad trend, they fare worse than average on indicators of disadvantage.

One example – which has been alluded to in articles in this publication before – is the below-average educational attainment of these groups.

Further disadvantage is evident in the fact that unemployment is higher whatever the educational qualification.

One reason for this is discrimination. For example, “there is strong evidence that ‘white’ applicants are much more likely to get job interviews than their minority counterparts”. This feeds into poorer outcomes over a lifetime, which includes outcomes related to disadvantage in retirement.

Since future pension income is, firstly, driven by skills and education, this matters.

Secondly, it will depend on what private resources future pensioners have. This will depend both on future working patterns of older individuals and on the extent to which individuals currently approaching retirement have built up assets that they will be able to draw on during their retirement. Finally, future pensioner poverty will depend on what tax and benefit reforms are enacted. On all these scores, there is a lot to be concerned about.

SAVINGS RATES LOW

Not only do people save too little in the UK, they also borrow and consume too much, relative to their later life income. If more were saved of current income, then pensioner poverty would be lower.

Of course, faster income growth is also important, but that depends on a host of other factors as well.

Household debt in the UK as a proportion of income is about 140 per cent of annual disposable income, which is up from around 60 per cent in 1980.

At the peak in 2008, household debt was nearly 170 per cent of annual disposable
income.

When the economic downturn occurred in 2008, it was a big confidence shock to many, forcing them into default, only averted by the Bank of England cutting interest rates to near 400-year lows.

But the flip side of this is that low rates encourage even more people to take on debt, and save even less.

It may be a short-term gain, but it is a long-term loss, as pensioner poverty will mean people reliant on the state for help.

It also lowers long-term interest rates, and pension funds depend on getting the returns to pay future retirees. That is one reason why so many company final salary pensions schemes are under water and in deficit. It is estimated that 30 per cent of all final-salary schemes are in deficit, with a ‘funding’ gap of nearly £400bn.

We are living longer and so need to provide more for retirement, but with rates low, the incentive is to save less and spend more. Quantitative Easing, where the Bank of England buys government
debt, also encourages low long-term rates.

It forces down long-term interest rates, so lowering returns on investment by pensions funds on which they depend to pay pensioners. That is one of the key conflicts of official policy at the moment. Low bank rates to boost economic recovery short-term may be causing long-term damage to savers and stability.

WHAT TO DO?
Here are some solutions to tackle the pensioner poverty problem:

* Official incentives, or rules, to force people to save more for retirement.
* Extend retirement age.
* Encourage skills and vocational training to boost later-life income.
* Educate people about the need to save for retirement.
* Better target the welfare system at those most in need.
* Legislate further to tighten rules to end age and ethnic discrimination at work.
* Remove obstacles that keep annuity rates low.
* Extend help and advice about the kind of options to save for pensions.
* Allow tax breaks to encourage firms on final salary and work place scheme to keep them going and in surplus.
* Reform official policy that keep down long term interest rates, as this hits pension funds and long-term savers.

Professor Trevor Williams is a visiting professor at Derby University, and member of the Institute of Economic Affairs

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