Wednesday, 10 October 2012

Let the pensioners pay!

A while ago someone who knows a good deal more than I (indeed than most of us) about global finance explained to me that the way out of the present crisis would be relatively simple as far as governments were concerned, but painful for savers.
We — and I do mean ‘we’ — have accumulated an inconceivable mountain of debt. Most of us understand a million pounds — people win that on the lottery every week. A billion pounds is a bit harder to imagine, but it is a figure regularly bandied about in government budgets, so we are used to it.
Now try to imagine a trillion pounds (which, apparently, is just short of the size of Britain’s national debt). A million pounds is a millionth of a trillion. If you had a trillion pounds and you spent a billion, you’d still have 999 billion left. And a billion is a thousand millions. At which point our brains go on tilt and we cease to think about this as a ‘normal’ figure to worry about.
Of course, governments always have a debt. But there is a reason to worry about this particular debt, because even governments have to repay their debts, but there is a way they can do this which is different from you and me.
My friend tells me that one of the crucial factors in the national economy is that there is no shortage of trees.
What he means is, paper comes from trees, money is just paper, and governments can always print more.
In technical terms, this is called ‘quantitative easing’. But of course it is not quite as simple as the government printing money and thus making money. If it were, governments could print money, give us all some of it, making us richer and happier, and then get voted back in. That, of course, would be silly — and wrong.
When money is printed, it creates more ‘money’ but, in itself, no more ‘wealth’. The aim of quantitative easing is to buy time. But in the meantime, someone has to take up the slack — so who is it?
The answer, says my friend, is savers. Quite simply, they are being made to pay by keeping down interest rates. Hence my eye was caught by an article in the Telegraph this morning headlined ‘Pension annuities in 'freefall' due to money-printing’. The article goes on to explain that,
“Annuities – which are bought with the proceeds of a person’s pension pot when they approach retirement - determine a savers annual income for the remainder of their life. However the value of annuities has plunged by seven per cent in just three months [...] The fall in the value of annuities means that a person retiring with a £50,000 pension pot would be able to buy an annual retirement income of £2,579 today. This compares with an income of £2,778 as recently as July, according a quarterly report from MGM Advantage, an annuity provider.”
However, my suspicion is that at this point some of our sympathies go out of the window. Who has £50,000 in savings? And what’s all this about ‘pots’, quarterly reports and annuity providers? Isn’t this the realm of high finance that got us into this trouble in the first place?
These aren’t, after all, the ‘real poor’ — we’re not talking about single mums on housing estates, or people on benefits, are we?
So someone has a couple of hundred pounds less per year as a result? They’re pensioners, for goodness sake! It’s not like they’re going out on a spending spree.
In any case, if things get really serious, the state will always step in. Indeed, the state will always step in, won’t it — whether it is people on state benefits or pensioners on state pensions?
Of course it will. Provided the money’s there.
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  1. Money is not even, paper, gold or base metal.Around 95% is book entries i.e. marks on paper and magnetic media.

    This argument cannot be voiced by the government for 2 reasons.

    1. Pensioners have votes and the time to keep themselves informed.

    2. Policy affects behaviour. If pensions are not trusted, people will not invest in them and lump sums will be taken rather than annuity purchased.

    The result is people living longer in houses they have paid for but are no longer able to maintain.

    West Yorkshire

  2. John,

    you're being extremely harsh. A £50,000 pension plot is not terribly large. Someone saving £50 per month into a pension plan which grows at 6% per year (a decent but not overly-optimistic rate) would have a pot of £50,280 after 40 years of saving, because of compound interest. Because pension savings attract tax relief, you'd only need to put in £40/month, or £19,200 over the 40 years.

    Most people not on benefits could afford £40 per month, lots could afford much more. If you do the maths, it clearly makes sense.

    When these people get their pensions, having saved sensibly, they aren't as much a drain on the treasury, because they don't need as much in benefits; they aren't as much a drain on the NHS, because wealthier people tend to be healthier; they contribute to the economy because they have more spending power; and they may even pay taxes on their pension incomes.

    This is not high finance, it's ordinary people's lives.

    Printing money also has a habit of sending inflation soaring, which wrecks people's lives.

    Now if you want to save the government money, raising the retirement age would do wonders. We are all living longer after all, and most people can expect to have a level of health in their 70s which used to be what people in their 60s expected.

    Or we could stop fighting wars ...

  3. Bernard, thanks for your comments. There was a certain amount of 'tongue in cheek' about what I was saying - but also a real point, in that I don't think people really do have sympathy for 'pensioners' as such - only what they perceive as 'poor pensioners' (dare we say "deserving pensioners"?). Hence I don't think there is quite the uproar about the way savers are being made to pay in the way that there ought to be.

    My friend referred to at the beginning says to me that it is these 'typical' pensioners who genuinely face hardship as a result of government policies and that it is going to get far worse.

  4. Two and a half grand isn't a lot to live on a year, about 10% of a clergy stipend?

    Could you do it when you retire? At least this lot of pensioners have large numbers who have homes that have been paid off. What happens when those in their twenties and early thirties who don't have a 25% deposit for a mortgage and therefore have to rent retire?

  5. John,

    I had detected the note of irony, otherwise I would have considered the post as callous and ignorant as comments once made about eating cakes. At the same time, you have not reached the level of Dean Swift's answer to the Irish population and food problem in an integrated policy!

    As you say the more serious question is how our society regards the old. When I was growing up I was taught to respect the old as people who has served the country through two World Wars. I am reminded of this as the news considers the preparations for the 100th anniversary out the commencement of hostilities. I believe that "a land fit for heroes" was used to justify the post-war reforms. Pensioners were referred to as retired teachers etc. and retained the dignity of their occupation. Now pensioners are portrayed as the guilty ones, a generation that took more than their fair share, passing the cost to the next generation. This is part of the conservative myth of the self made man. We all owe more to society and our ancestors than we can name.

    West Yorkshire