Is the writing on the wall for the state pension?
HAS your toddler ever decided that the living room wall was a grand place for trying out their new set of coloured markers?
And you came in, to hear them proudly exclaim, in perfect toddler-speak, ‘Wall!'?
Well, the writing may be on the wall for the state pension too - at least for the state pension as we know it.
Imagine the state pension as the upper part of an hour-glass, with sand (money) constantly trickling out, to pay our pensions.
Well, the hour-glass has only about another 15 years before it will be empty, with just a grain or two left to spend.
These are the findings of new projections by the Government Actuary's Department (GAD – or, in this case, ‘Oh my GAD'...), taking into account the changing demographics in a society that is now, it could be said, older than ever before.
The generation of post-war babies born between 1946 and 1964, known as the ‘Baby Boomers' are now, gradually, coming to retirement age. That population explosion has blown a hole in the state pension, and money is leaking out at a fierce rate.
The writing has been on the wall for some time. The number of people turning 65 in 2012 was up a third on the previous year, and well over 600,000 people have turned 65 each year since. Over 3.3 million people have hit state pension age in the last five years (source: National Census).
The turning point for the state pension is expected in 2025-26, when outgoings are expected to exceed incoming National Insurance Contributions.
There's a hole in our bucket. It's not rocket science.
There are several other aspects that underlie the crisis in state pension provision.
One is the ‘pension triple lock', which increases the pension every year in order to offset the effects of inflation.
The pensions triple lock was introduced in 2010. It raises the value of the basic state pension in line with either inflation, average earnings, or 2.5 per cent, whichever is the higher. This helps protect the spending power of the pension, making sure that you can purchase the same amount of goods as last year.
It's an expensive business, though – last spring Theresa May pointed out that this handy guarantee would cost £45 billion over 15 years. This could make the triple lock the next victim of the government's campaign to constrain the cost of the state pension.
It doesn't help us with the bigger picture, though: there's going to be more going out of the fund than coming in. The GAD squad reckon that, all other things being equal, keeping the state pension on life support would cost around £11.6bn a year in 2030, £151bn by 2060 and £482bn by 2080.
The last time there was a leak like this, Noah built himself a boat.
They say that the situation could be brought under control (for now) with a 5 per cent
increase in National Insurance Contributions. However this would be an interim, ‘sticking plaster' solution and as we know, politicians prefer to cut services, which alienates part of the votership, rather than ask the public for extra cash, which alienates everyone.
We know they are currently overseeing a gradual increase in the state pension age, so that we're paying into the pension for longer, and drawing it for a shorter time. The pace of that age increase has been speeded up, and will almost certainly be further speeded up in future.
But then – and let's address the ‘elephant in the room' here – the value of the state pension to pensioners, on a month to month basis, could also be cut.
It hasn't happened yet, and it would be an unpopular, but not impossible solution. There, but for the grace of GAD, go we.
GAD make the point that their projections are based on the assumption that fund benefits remain as currently defined – a hint that current levels of pension payment could well be changed. And not in a good way.
This casts a long shadow over the financial wellbeing of the currently retiring baby boomers, but even more on Generation X (born 1966-1976) Generation Y (1977-1994) and Generation Z (1995-2012).
All of this makes it wise to consider talking to a financial adviser about making our own pension provision, perhaps by setting up a personal pension.
After all, as that established master of toddler-speak Donald Trump might say, future changes look likely to affect us ‘bigly'.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005. Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd'.