Tuesday 25 March 2014

Ending annuities is just the start of retirement reform

[retiring at 40.jpg]
Great hay has been made this past week about the Government changes to annuities and what an amazing budget this was etc etc. I don't see it that way really, the change to annuities is sensible and brighter recent pensioners will wonder at the deep cynicism of the Government to propose a change only after 6 years of the lowest annuity returns of all time!

What is more interesting is thinking about where the Government is going and indeed society as a whole. Despite our Government's slowness on changing pensions and retirement strategy, it is actually a long way ahead of most OECD countries who instead have ignored this issue as too hard to deal with and left it for the future Government's to sort out.

However, with a huge increase in over-65's and indeed 70's and over-100's there are big challenges ahead. Plus we have the more to automation of many jobs which means the economy will produce fewer jobs in the near future at the same time as the population rises. Clearly, the younger population will not be able to support the older and wealth transfer down the generations will only last one or two before the Country is in penury.

A really radical solution is called for and I would suggest this, compulsory 10-year work breaks at 40, with a mini pension created for this time and state support for parents during this time. 40 is a good age as most people are still full of youthful energy and can live full lives. It's a much better time to enjoy yourself and typically one's young family at that time.

This break will reduce pressure on the need for job creation, particularly in a world where labour is transient in any event and roles can be filled more easily. Once the age of 50 is hit you can look forward to another 25 years of work before 'real' retirement at around 75. The pension needed post-75 is a lot lower than post-65.

The merits of the above are bountiful and help with the technology challenge we are facing too. Of course, if people do not want to stop work then they will not have to - similar to having children and paternity/maternity rights now. The benefits can be arranged to be advantageous to those who take the break, but it would not be compulsory, just financially and lifestyle attractive.

It's a radial suggestion now, but in due course we are going to have to think of very innovative ways of keeping the workforce engaged until a later age as well we to share around employment opportunities in the age of automation.


Blue Eyes said...

Re Automation: this is a dog that has failed to bark from Ludd onwards. In the 60s people were told to "train for leisure". Who designs the machines that automate the manufacturing? Who washes their laundry and makes their coffee?

As for pensions the straightforward answer is to abolish defined benefit schemes once and for all. This means much worse terms for the next generation of public sector workers. Cry me a river.

As for compulsory ten-year career breaks: have you abandoned all sense of economic reality? Or is this CU in need of a good holiday?! ;-)

Other than those points I agree with your post, as usual.

dearieme said...

The solution is compulsion? Then let us compel the moneymen in The City to support the rest of us. Like your scheme it might mean closing the borders to emigration but presumably you wouldn't mind that.

Electro-Kevin said...

An era of wealthy retirement couldn't last long. It is unsustainable.

Everyone having their own space and their own lives ?

Let's think back along.

What did family living used to be like before pensions ? Multi generational occupancy will return - gramps looking after grandchildren while mum and dad bring in the bacon.

You know my feelings on automation and outsourcing of work. (Now mass importation of 'cheap' labour too.) I wouldn't mind it so much if it hadn't all been government subsidised through welfarism. There would have been a proper adjustment to a balanced population by now if it hadn't been.

The move on annuities is not clever. It is purely and simply a desperate administration seeking another cash boost for the economy and they are hoping it goes into a housing boom which is about the only trick that they seem to know.

CityUnslicker said...

BE - In the 1960's we had near full employment. Today we are pleased if we can get it nearer to 7% unemployment. Unemployment in all major countries has increased decade on decade for 30+ years now. Ford employed 300,000 and google employs 3000. the hairdressers and taxi drivers are unaffected, but blue and white collar work is affected.

Automation is a key driver along with immigration.

Blue Eyes said...

The reasons we have structural unemployment are: high taxes, over-regulation, and an expectation of ever-increasing living standards. We demand huge wages so lots of industries are not viable in the UK.

Telling everyone to take a decade off at the peak stage of their career is productivity suicide!

EK is right: if we want to be rich we have to work more, not less.

Blue Eyes said...

CU if you think the only changes to have happened since the 60s are automation and immigration I suggest you look a bit wider.

James Higham said...

Quite like my annuity, thanks very much.

Demetrius said...

On Sunday 23 March I posted on Lamborghinis For Sale in broad terms but finally suggesting that the retirement age should go to 85 arising from complexities and demographics. This may not be a popular solution.

paul said...

A ten year gap,just think if that gap fell at the beginning of the computer revolution by the time you started back to work the skill set would have changed out of all recognition maybe 1 year out per decade say at 30,40,50 to stagger it impact

Electro-Kevin said...

Blue - I'm not sure how we can be rich.

I know what I'd suggest were the system not broken and out of control.

That would be mentoring of the young by soon-to-be-retireds.

In a well managed country automation should be maximising output and those remaining individuals skilled enough to design, operate, service those machines would be better paid to make up the shortfall - the non-welfarised country reaching optimal population levels to help cope.

Alas the system is wildly out of control with unquantifiable mass immigration and there seems to be little point in suggesting anything, let alone innovative policy. Projection, forecasting and analysis is entirely made up under these conditions. All we can say for sure is that there will not be enough and most of us are going to find things are more difficult.

Anonymous said...

I think there may be deeper thinking behind this - the sort that came out of the nudge unit.

Pensioners spending to inflate the economy by releasing cash to improve/convert housing. More holidays. More tax!.

Less tied up and being shipped offshore by the pension funds. Less churning of assets by private equity with their 30% take on bubble "profits".

Quite redistributive.

Nick Drew said...

10-year state-funded sabbatical @ 40 ... well that's radical, OK! (how old did you say you were, CU ..?)

"The pension needed post-75 is a lot lower than post-65" - only if you stay in very good health and/or the NHS can mop up the dreadful age-related problems, otherwise needs rise steadily (even after car & holidays are no longer on the list of annual expenditures), check out the cost of decent care

I am with anon@ 5:28, 'cept I think this is a very technical area & I don't know enough about it

(I do know Osborne's strategic capabilities are over-rated ...)

what I am sure of: this one is Big, & deep into Unintended Consequences territory - just like the massive debt suddenly thrust on students

these massive 'cultural' experiments are so drastic, and it's really hard to know how they will play out

DJK said...

The lack of investment in British industry is the flip side of inadequate pension savings. It seems to me that removing the restriction to buy an annuity is just a cynical ploy to get retirees to blow their pension fund to help get Cameron & Osborne reelected, and hang the consequences of future pensioner poverty.

I don't know what the answer to automation, outsourcing and mass immigration is, and I'm not hopeful of the future.

Blue Eyes said...

Paul, why not annualise it to minimise the disruption. Four weeks a year, say?

EK I know what you are saying but this is what the Marxists said would happen with uncontrolled capitalism. We don't have uncontrolled capitalism, we have a hugely redistributive system which captures a lot of money from the highly skilled and spends it on ensuring that the "poor" have a (relatively to previous generations and many societies even now) comfortable existence.

Rich? The poor are rich by historical standards: universal education and healthcare, most live in solid housing, many can afford foreign travel etc..

Anon it's clever for several reasons: the extra spending, the financial innovations that may result (such as borrowing against one's own pension fund) and the brisk effect that competition will have on the annuities market for those who do want one.

andrew said...

Pensions is a business with a lot of history that looks off into the far future.

Looking into the future first:

People are different. If you have been in the Army / Front line Police / a Farmer / Diver all your working life you are pretty much professionally finished by the time you are 55-60.
If you are a surgeon, your fine motor control will start to deteriorate significantly from age 60 ish - I would not want a 65 year old surgeon working on my knee reconstruction.

If you sat on your bottom in an office for 40 years then you may not be up to date with current developments in your field, but still physically able.

If you have non-critical health issues that shorten healthy life like diabetes you may want to retire as soon as you can.

In short people age at different rates and need to retire at different times.

Once you cannot do one job anymore (diver) does not mean you cannot retrain and do another job (taxi driver)

If you are lucky you may be able to slowly reduce your hours over a number of years.

This means that the entire concept of retirement has become a much more fluid thing.

One thing does remain constant. The very strong chance that you will be dead by age 120. It seems that there is something in human physiology that makes it hard for people to live forever.

Personally I am rather saddened by that. In addition Kurzweil's singularity seems to be 30 years off and likely to remain so.

Looking into the recent past.

Possibly like other areas of financial services, the regulatory burden seems to be increasing exponentially.
I remember attending a large public meeting with the HMRC where their representative said that the intention of simplification in the Finance Act '04 was to end up with regulations that would shrink from about 120 pages to 4.
In 2007 once the regs were in place we ended up with 1500 and they are web based so you cannot always be sure what is changing.


Putting in place a system of tax-advantaged saving that allows you to choose when to retire - or how much to retire - and allowing for the chance of of un-retiring is very sensible.

One thing that freedom provides is the chance of failure and so there is an increased need for a safety net - like a basic state pension but set at a reasonable level.

Otherwise you will see 70 year olds who invested in the future equivalent of lloyds or polly peck out on the streets.

There are two big problems
- based on past performance a fairly good idea will end up as another layer of regulations on top of all the other regulations.
- a good pension is very very expensive.

Anonymous said...

@Blue Eyes - the new industries are pretty much increasingly less human needed.

Who'll build the machines? Well, 3D printers (eventually.) Who'll build the 3D printers? Well, we've already a proof of concept 3D printer that prints it's own parts...

Last year we even had the first artificial burger, when we can print cells kiss good bye to mass farming and most fast food workers. Not long before you'll be able to order your crap patty on your McApp, paid as you order online, and awaiting at the store you picked with zero human interaction.

The US military are already using driver-less trucks.

We already use printed parts in humans, and printed organs are on the way.

Previously new technologies closed off old jobs, but opened a plethora of new ones, this time round the new jobs will also be for machines, and the targets are a lot more widespread.

We're at a moment like when Lyons had their first computer, few then anticipated what they'd become, and even those who saw their potential never saw just how widespread and varied in use they'd become, so who knows where we'll be in 50 years? I expect even my most fevered imaginings will seem tame.

Unemployment can only go upwards now, and it is a case of mitigating the changes. In a decade I expect north of 10% unemployment to standard in the most robust economies.

Personally, my favourite is, as I've mentioned before, a UBI system that only British Citizens can be in. No more benefits (other than disability ones), bin the minimum wage and if you're a NEET, well, you'll be having to do something for your lucre, even if it is 10 hours a week cleaning the streets.

The Left love to bang on about the rights of the social contract, time I think to reintroduce the concept of the responsibilities also attached to it. Plus, binning the minimum wage and only having the UBI open to Brits means the Yoof become worth taking a risk in training up as they'd then be cheaper than an educated Pole.

It wouldn't be cheap, but it would be universal, and would allow the government to attack the benefitistas in a manner even Labour and the Lib Dems couldn't argue with. 'Free' money for all, plus layabouts given a boot up the backside.

And instead of an enforced decade off (how the hell would you be employable afterwards?) I'd rather see tax incentives to increase job sharing. Makes sense. A 9-5, 5 day a week office could be converted to a 8-6, 6 day a week office where the 6 days are split between 2 people. Wouldn't be suitable for every job, but for enough it would be. The office gets an effective worktime boost of 50% (productivity is another matter), people are taken off unemployment, staff would see a 40% drop in their working week in exchange for a 25% drop in earnings.

It'd take a hell of a lot of beancounting to make it feasible, and a whole raft of consequences to deal with, but given mass unemployment in the near to mid future is pretty much inevitable now, I'd rather that than riots.

If a kid asked me for career advice today, I'd suggest to them reading up on 'artisan', 'boutique' and 'hipster' as they'll be the profit takers of the future as people pay a premium for human-grown, human-farmed, human-made and human-served goods. Everything else will be machines.

Dick the Prick said...

Birds live longer and feminism is for grandaughters to pay for. Pension markets have to adjust. I'm not gonna stop working at 40, quite like it.

Bill Quango MP said...

Anon 10:36

We do have a sort of job share already. Here at BQ Industries 80% of people are part time.
Of the work those 80% do, about half of it is full time. So some 40% of workers are effectively job sharing, but not in the way you suggest.

Instead people work half-days, 2 or 3 days a week.

And that is repeated across almost every supermarket, chain store, hospitality suite, cafe and warehouse in the land, and probably explains how unemployment has fallen during a recession.

CityUnslicker said...

ND - You think i woudl suggest this merely becuase I am 40 in the not too distant future...outrageous.

I appreciate all the comments and I have another equally amd idea for release on the topic later in the week!

TheNameOfTheGame said...

The answer is obvious and CU is just going to have to swallow it - a land tax.
Its the only way to stabilise the tax base. That must be the priority before any more CU/UKIP/I'm-alright-Jack brain farts are considered.

The UK consists of roughly 60m acres. Projected tax take from this year is about 600Bn. A simplistic, fag packet calculation of £1000 per acre per annum tax would bring in 60Bn or 10% of the total tax take. It would have the additional benefit of squeezing the rentiers, subsidy leeches and inherited lands crowd. Watch the price of land and housing fall.

To whoever mentioned it, yes the nudge unit seem to be at work but only to crucify the current 25-50 year olds and later to have pensioners piled high in tenements.

Its either a Land Tax in some form or other (see the Libs 'Mansion Tax' next year for a taster) or we need a bloody good flu virus in the next few years to thin the ranks of the bed-wetters.

Jim said...

"The UK consists of roughly 60m acres. Projected tax take from this year is about 600Bn. A simplistic, fag packet calculation of £1000 per acre per annum tax would bring in 60Bn or 10% of the total tax take. It would have the additional benefit of squeezing the rentiers, subsidy leeches and inherited lands crowd. Watch the price of land and housing fall."

Whatever you're smoking I want some. Ignore for a minute whether or not a Land tax is a good idea, just lets examine what you have suggested.

A tax of £1000/acre will add approx £200-300 per year for the average house plot in tax. Hardly going to make that much difference to the price of the average house is it? Whereas the absolute highest productive capacity of farm land (which makes up about 85% of the UK) is c. £3-400/acre. Thats for the best land producing the largest crops. Most will be half that, vast swathes of uplands maybe only 10% of that. So how exactly is anyone going to be able to pay this tax of £1000/acre/year? They don't have the money to pay it, and they can't sell the land to pay it, it'll be worthless. So it would raise zero from 85% of the land area, because no-one could afford it. So at best it would raise 15% of the 60bn you suggest, at the expense of destroying the entire agricultural sector of the economy.

What a great economic plan. Got any more grade A ideas like that one?

Bill Quango MP said...

Beat me to it Jim.

There is a very good reason why agricultural land is exempt from inheritance tax. Posted about it a while back.

But on that occasion the LVTers had more support.

See here

I really should revisit this. I'm not sure my point about the consequences of land tax was properly understood.

Anonymous said...

Lib(dumb)s have been banging on about a land tax since at least the early 1900's when the target was the great landed Tory estates.
It's an article of faith with these people.

SameNameAsBefore said...

"A tax of £1000/acre will add approx £200-300 per year for the average house plot in tax. Hardly going to make that much difference to the price of the average house is it? "
To call this horseshit would be an insult to both horses and shit.
A tax on land would prevent people buying and holding land off the market, thus reducing supply, thus artifically increasing prices. IF you need things spelt out to you on this level you shouldnt really be using the internet unsupervised.

"...the absolute highest productive capacity of farm land (which makes up about 85% of the UK) is c. £3-400/acre."
Anyone with a whit of imagination, or indeed appreciation of the dire situation we find ourselves in - would understand that I had written in very, very simplistic terms. A tax of £10 per acre on used agricultural land would be subsdised by a tax of £10k per acre on Kensington. If this needs to be pointed out on this site... I despair!

To quote BQs post 'it was a death blow to the landed classes. Their wealth drained from their estates and into the government. Land was sold. Estates divided up. The art, jewels, statues and heirlooms were sold off to pay the horrific costs of owning such an enourmous house and its upkeep in the first place, and to pay the taxman. On the wiki page of inheritance tax says - introduced in 1894 - effective in breaking up large estates. It certainly was.'
Whats not to like?
Providing subsidy in the form of tax-relief as opposed to grants would incentivise owners to actually be productive with their land instead of paying £65 for some half-arsed business plan designed to bring in grant cash.

I'm not gonna pay for minders to pamper a socialist generation who didnt pay their own bills and expect me to pay for their asses to be wiped while my kids have to pay for University education that they got for free.
Fuck em.
Tax THEIR assets, not mine.