Working more for less . . .
You may have heard of the fabled state pension crisis. This fast-approaching event is irrespective of the current economic situation but has everything to do with demographics.
Originally, when Lloyd George introduced the foundation of our basic state pension in 1908 to Britain, it would see a payment of five shillings to poor men who had reached the age of 70. However, at that time the average lifespan was just 50 years old and generally much lower for the poor.
Unsurprisingly, only a small minority enjoyed this. Present life expectancy for males and females in Britain stands at 77 and 81 years old respectively and is continually rising at a rate of five or more minutes a day. Obvious then that a system meant to support very few for a short time would come under increasing strain with the pressure of many that dependent on it for much longer. This is the first ingredient in the formula to create pension catastrophe.
The second component in this equation is the decline in birth rates in Britain, which is reflective of most economically developed countries. The average number of children per woman in all OECD countries was 3.2 in 1960; today this has fallen to 1.6. Ultimately, a shift in the dependency ratio will develop where there are fewer people in the workforce and more in retirement. This is on the verge of explosion with the post-war baby boomers on the brink of pensionable age.
Apart from opening up borders and increasing immigration, a government’s other option is to reduce the burden on the pension system by increasing the retirement age or reducing the generosity.
Britain is already implementing a rise in pensionable age to 68 by 2046 and downsizing benefits and shifting the responsibility to the pensioner to provide for their own retirement. But as we have seen in recent months private and company pensions returns are less than certain. This leaves few options for the retiree, meaning many will have to work long past pensionable age and eventually receive a meaner pension.
Dr. Danielle Aw (Ph.D.)