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Is our approach to the so-called "pension crisis" wrong-headed?


feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
There's a common refrain that most people "aren't saving enough" to guarantee themselves a decent pension 30 years from now.

What exactly would "enough" refer to?

People seem to imply that they hace some clue as to how to save in 2013 so that you've got a decent nest egg in 2043. By and large they absolutely rule out a simple bank account. No, they mean put it into a pension fund. What's that? It's a legal fiction that takes the money and dumps it onto the world's stock exchanges and hopes for the best.

What will stock markets look like in 2043? Maybe they will be stellar, with prices having grown far in excess of real inflation. Or maybe they won't. The crisis of 2008-present came extremely close to reducing the value of most pensions funds to zero. On what basis are we assuming that there won't be another collapse before 2043? Why are we assuming that such a collapse will be smaller than 2008?

Sure, I would like to have a big fat pension fund that has risen in value. I would be satisfied with one that has maintained its value, but I would be really irked by one that had fallen seriously due to a stock market crisis.

It's far from obvious that the world has a rosy future of economic growth left in it. Virtually all the developed countries are either shrinking or nearly shrinking. The only countries that are growing are backwards countries playing catch-up. Once they're caught up, where do they go? Why would their growth not stall the way all the developed countries have?

What do I want out of old age? Same as most, I expect. Decent, responsive health care. A pleasant, tastefully-furnished place to live, regardless of who owns it. Access to the kinds of entertainment popular with the majority of adults.

At least one of these we can start preparing right this minute, without trusting to the vagaries of the stock-traders of 2043, who are right now in nappies. We can decide what kind of dwellings we want to be in in our old age, take the money we were going to throw onto the stock market for 30 years, and use it to build those dwellings! We can do it deliberately and carefully, inspecting the buildings rigourously to ensure that they're the type that'll work well for 150 years.

That's the housing costs of taking care of our 2043 retirees. What next? Medical care! Instead of putting billions of Euro onto the stock market year in, year out, we just put it into training lots of young medical pros, to look after us in 2043 onwards. Entertainment? Simple decree: every provider has to give out 10% of his sales for free to OAPs. It functions like a 10% tax on the vendors. Less than today's VAT (which we can phase out).

This seems outlandish, to suggest that doing the sensible thing and spending the next 30 years putting away 10% of your earnings on what is, ultimately, a gamble on an entity that has recently proven itself capable of losing everything people had put into it.

But really, with the benefit of hindsight, isn't it equally outlandish to say that even after the lesson of 2008, we still think that taking a huge punt on the stock market is the only way to provide good things to people in 2043?
 


hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
Sure, I would like to have a big fat pension fund that has risen in value. I would be satisfied with one that has maintained its value, but I would be really irked by one that had fallen seriously due to a stock market crisis.
Why are you worried about short term performance when you're investing for upto 40 years? If you're afraid of ever making a loss, put your money into a cash pension (and watch inflation eat your savings).

The people I feel sorry for are those whose pension depended on someone else - e.g. Waterford glass workers. And because no-one wants to wait until they are at retirement age to find out that the person they depended on has let them down, the more choice and control we give people the better.

BTW I think PS workers should be able to opt out of their pension scheme. Having to rely on the Irish government to provide for you is an unpleasant thought.
 

ManOfReason

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Joined
May 24, 2007
Messages
4,328
When you start saving you put your money in the stock market, index funds are the only sensible option for the individual non professional investor, because with the benefit of time you can ride out any setbacks and get the highest average returns. As you get into your 50's you should SLOWLY move your money into less volatile investments linked bonds.

Unfortunately in Ireland you are hampered by two huge problems with your retirement investments:

1) The fees for investment funds are way to high, often 5% of what you put in, 5% of what you take out, and 1% or more for every year you have it in there. It is nearly impossible to make anything but modest returns with these kind of charges.

2) When you retire you MUST (assuming you took the tax advantages) put all your savings in a Retirement Annuity which in Ireland are really bad value for you.

Of course these two situations exist because all Irish governments look out for special interest groups (in this case banks and insurance corporations and their hangers on) rather than the individual.


The only financial advice you should consider is from an independent financial adviser who works for an hourly fee, that you pay them, rather than one who works for 'free' ie commission - those kind will not put your interests first, they are salesmen not advisers.

- End rant.
 

hmmm

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Joined
Oct 4, 2006
Messages
2,834
2) When you retire you MUST (assuming you took the tax advantages) put all your savings in a Retirement Annuity which in Ireland are really bad value for you.
ARFs are available for many people, but as per usual in Ireland there are too many regulations and finickity tax implications.

An ARF should be open to everyone, who can then decide whether they want to hand their money over for a guaranteed (and low) annuity or manage their investments themselves.
 

Sync

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Joined
Aug 27, 2009
Messages
28,776
TSimple decree: every provider has to give out 10% of his sales for free to OAPs. It functions like a 10% tax on the vendors. Less than today's VAT (which we can phase out).
Can you spend literally 15 seconds on this and see what's wrong with that idea?
 

Cooperate for freedom

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Joined
Nov 11, 2010
Messages
3,701
Funding a pension privately for many working people is simply unaffordable after paying mortgage, rearing kids etc. a solid state pension is vital with top ups being encouraged for those with surplus.
 

Cooperate for freedom

Well-known member
Joined
Nov 11, 2010
Messages
3,701
ARFs are available for many people, but as per usual in Ireland there are too many regulations and finickity tax implications.

An ARF should be open to everyone, who can then decide whether they want to hand their money over for a guaranteed (and low) annuity or manage their investments themselves.
Wrong. arfs are available for all except those in defined benefit schemes who enjoy a better value annuity provided the scheme is correctly funded.
 

Jem8777

Well-known member
Joined
Dec 13, 2010
Messages
470
When you start saving you put your money in the stock market, index funds are the only sensible option for the individual non professional investor, because with the benefit of time you can ride out any setbacks and get the highest average returns. As you get into your 50's you should SLOWLY move your money into less volatile investments linked bonds.

Unfortunately in Ireland you are hampered by two huge problems with your retirement investments:

1) The fees for investment funds are way to high, often 5% of what you put in, 5% of what you take out, and 1% or more for every year you have it in there. It is nearly impossible to make anything but modest returns with these kind of charges.

2) When you retire you MUST (assuming you took the tax advantages) put all your savings in a Retirement Annuity which in Ireland are really bad value for you.

Of course these two situations exist because all Irish governments look out for special interest groups (in this case banks and insurance corporations and their hangers on) rather than the individual.


The only financial advice you should consider is from an independent financial adviser who works for an hourly fee, that you pay them, rather than one who works for 'free' ie commission - those kind will not put your interests first, they are salesmen not advisers.

- End rant.
Also, Government currently raiding pension funds for "job creation"
 

Cooperate for freedom

Well-known member
Joined
Nov 11, 2010
Messages
3,701
When you start saving you put your money in the stock market, index funds are the only sensible option for the individual non professional investor, because with the benefit of time you can ride out any setbacks and get the highest average returns. As you get into your 50's you should SLOWLY move your money into less volatile investments linked bonds.

Unfortunately in Ireland you are hampered by two huge problems with your retirement investments:

1) The fees for investment funds are way to high, often 5% of what you put in, 5% of what you take out, and 1% or more for every year you have it in there. It is nearly impossible to make anything but modest returns with these kind of charges.

2) When you retire you MUST (assuming you took the tax advantages) put all your savings in a Retirement Annuity which in Ireland are really bad value for you.

Of course these two situations exist because all Irish governments look out for special interest groups (in this case banks and insurance corporations and their hangers on) rather than the individual.


The only financial advice you should consider is from an independent financial adviser who works for an hourly fee, that you pay them, rather than one who works for 'free' ie commission - those kind will not put your interests first, they are salesmen not advisers.

- End rant.
In fairness I know many tied agents who give excellent, professional and honest advice very often for free.
 

hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
Funding a pension privately for many working people is simply unaffordable after paying mortgage, rearing kids etc. a solid state pension is vital with top ups being encouraged for those with surplus.
So who's funding the pension instead if the "working people" cannot afford it? Someone has to pay for it.
 

gatsbygirl20

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Joined
Dec 1, 2008
Messages
22,773
At present, six out of every 10 private-sector staff have no work-based pension -- and rely on the state- contributory pension when they retire.

Million of us face paying 15pc of wages into pensions - Independent.ie
Why are people so dismissive of the state contributory pension?

It is guaranteed and its defined benefit

People at the lower end of the PS despite putting a big whack into their pension won't be getting much more.

Many PS workers at the moment put 15% into their pensions.If people want to have a "decent" pension on retirement, I guess that is what is required

Some posters on another thread say they want nothing to do with government pensions.They know enough about pension equities, etc.,to provide for their own old age

You would think after the way financial institutions have behaved, that they would be very wary of private pension providers.

But apparently not. It's politicians that they're scared of.
 

Amnesiac

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Joined
Oct 27, 2011
Messages
1,035
Many expect the government to provide them with a basic pension. It's easy to see why people "aren't saving enough" when they assume the state will support them in old age. Why save wisely when younger taxpayers will top up your retirement income?

Forcing people to invest in private pensions is clearly undesirable. An alternative would be for the government to signal that future state pension provision will be insufficient for most people. This means cutting payment rates and/or means-testing the payment.
 

hmmm

Well-known member
Joined
Oct 4, 2006
Messages
2,834
Why are people so dismissive of the state contributory pension?

It is guaranteed and its defined benefit
It's guaranteed only insofar as the government can pay it. There is no way we can maintain the current state pension with the decline in the number of younger contributors over the coming decades, so something has to give. And what will give is the benefit, as we can't tax workers into oblivion.
 

Cooperate for freedom

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Joined
Nov 11, 2010
Messages
3,701
So who's funding the pension instead if the "working people" cannot afford it? Someone has to pay for it.
I said "many" working people couldn't afford to fund a private pension. Some can, particularly those with few children or debt.
 

Cooperate for freedom

Well-known member
Joined
Nov 11, 2010
Messages
3,701
It's guaranteed only insofar as the government can pay it. There is no way we can maintain the current state pension with the decline in the number of younger contributors over the coming decades, so something has to give. And what will give is the benefit, as we can't tax workers into oblivion.
Young immigrants will be imported. Germany is already using this as a means of solving their ageing problem. And older people who vote in large numbers will happily tax the holes of young workers.
 

feargach

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Joined
Dec 11, 2006
Messages
4,995
Young immigrants will be imported. Germany is already using this as a means of solving their ageing problem. And older people who vote in large numbers will happily tax the holes of young workers.
Have you seen the massive differences in growth between the developed world and the former third world?

Have you tried extrapolating that out to 30 years from now?

It means that by 2043, Europe will no longer be richer than Africa, India or Brazil.

I don't say that this outcome is guaranteed, but the simple fact is that if the current differential in growth rates does not change, then yes, they will pass us out, or at least come very close to our level of wealth.

In that situation, simply "importing" young immigrants would not be that easy.

For example, immigrants didn't flood into Ireland from 1996 to 2007 because they were desperate for our rain.

They came because our rate of job creation was higher than in their home countries.

I don't know if you noticed what happened in 2008, but that's no longer true.

Job creation is happening in the developing world nowadays, and jobs are being steadily destroyed in North America and Europe.

Walk me through what would attract immigrants to come to Europe in the 2040s, given that job creation is on a very serious downward trajectory here.

You might say that the trajectory might reverse, but I'd need to see your reasons for assuming that reversal would happen in a way that would attract immigrants.

For example, if the ECB of 2040 were to devalue the Euro so that it is the same as the rupee or the yuan, it would definitely make European companies very competitive against India and China, but it wouldn't attract many immigrants, because they only travel if they can make MORE money than they could at home.

You could argue that growth would collapse in the rest of the world, but why would that necessarily mean that Europe would be able to pull itself out of its death-spiral? We've not shown any sign of pulling ourselves out of the self-inflicted mutilation of austerity, so rosy scenarios don't seem very realistic.
 

feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
At present, six out of every 10 private-sector staff have no work-based pension -- and rely on the state- contributory pension when they retire.

Million of us face paying 15pc of wages into pensions - Independent.ie
How will those workers who have a work-based pension feel if (perhaps "when" is more appropriate for some of these) another 2008-style crisis happens in the year before they are forced by law to retire?

Have you any appreciation of how close the West came to all the retirement funds being rendered worthless in 2008?

It took an immense commitment to bail them out.

In 2008, the governments of the west were in a position to bail them out. But in 2043, the governments of the west will form a smaller proportion of global GDP. Their share of global GDP has already fallen very significantly in the 5 years since the crisis. It is already certain that it will be another 5 years before it is even theoretically possible for the west to be growing at the same pace as the developing world.

If a 2008-style event happens in 2040, there is every possibility that the governments of the west will simply have to stand by and let it happen. Right now, they certainly lack the resources to tackle such a crisis. It's not at all obvious that they will have those resources 30 years from now, or ever.
 

Prester Jim

Well-known member
Joined
Jul 3, 2009
Messages
10,057
There's a common refrain that most people "aren't saving enough" to guarantee themselves a decent pension 30 years from now.

What exactly would "enough" refer to?

People seem to imply that they hace some clue as to how to save in 2013 so that you've got a decent nest egg in 2043. By and large they absolutely rule out a simple bank account. No, they mean put it into a pension fund. What's that? It's a legal fiction that takes the money and dumps it onto the world's stock exchanges and hopes for the best.

What will stock markets look like in 2043? Maybe they will be stellar, with prices having grown far in excess of real inflation. Or maybe they won't. The crisis of 2008-present came extremely close to reducing the value of most pensions funds to zero. On what basis are we assuming that there won't be another collapse before 2043? Why are we assuming that such a collapse will be smaller than 2008?

Sure, I would like to have a big fat pension fund that has risen in value. I would be satisfied with one that has maintained its value, but I would be really irked by one that had fallen seriously due to a stock market crisis.

It's far from obvious that the world has a rosy future of economic growth left in it. Virtually all the developed countries are either shrinking or nearly shrinking. The only countries that are growing are backwards countries playing catch-up. Once they're caught up, where do they go? Why would their growth not stall the way all the developed countries have?

What do I want out of old age? Same as most, I expect. Decent, responsive health care. A pleasant, tastefully-furnished place to live, regardless of who owns it. Access to the kinds of entertainment popular with the majority of adults.

At least one of these we can start preparing right this minute, without trusting to the vagaries of the stock-traders of 2043, who are right now in nappies. We can decide what kind of dwellings we want to be in in our old age, take the money we were going to throw onto the stock market for 30 years, and use it to build those dwellings! We can do it deliberately and carefully, inspecting the buildings rigourously to ensure that they're the type that'll work well for 150 years.

That's the housing costs of taking care of our 2043 retirees. What next? Medical care! Instead of putting billions of Euro onto the stock market year in, year out, we just put it into training lots of young medical pros, to look after us in 2043 onwards. Entertainment? Simple decree: every provider has to give out 10% of his sales for free to OAPs. It functions like a 10% tax on the vendors. Less than today's VAT (which we can phase out).

This seems outlandish, to suggest that doing the sensible thing and spending the next 30 years putting away 10% of your earnings on what is, ultimately, a gamble on an entity that has recently proven itself capable of losing everything people had put into it.

But really, with the benefit of hindsight, isn't it equally outlandish to say that even after the lesson of 2008, we still think that taking a huge punt on the stock market is the only way to provide good things to people in 2043?
Intelligent and interesting OP as always Feargach.
 

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