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Are increasing numbers of pensioners destined for poverty in future years?

Globally, aging represents an issue that is facing countries and governments on every corner of the globe. Termed the “…graying of the baby-boom generation…”(Business Week, 2005) this group of individuals 60 year of age and older are growing sixty percent (69%) faster than the world’s population (Business Week, 2005). Statistically, the rate of growth for this group at 1.9% per annum as resulted in one of nine individuals that people aged 15 through 64 support as a result of retirement age (Global Action on Aging, 2005). The foregoing ratio was one out of twelve in 1950 and is forecast to increase to one in four by mid century (Global Action on Aging, 2005). The implications for governments, companies and individuals is staggering! The miracles of modern medicine have increased the average life span and this coupled with the baby boom has generated the retiree ratios. A full two decades have been added to the average life span on a global average since 1950 whereby 66 is the average today (Business Week, 2005).

Planners in pension systems at companies as well as on the governmental level were not prepared for the decline in the fertility rate from the five to six children being born per female in the 50’s to just the one or two today (Business Week, 2005). The preceding decline in fertility rates however was called for as a result of the jump in the world’s population from 2,556,517,137 and an average annual growth rate of 1.47%, to 9,182,201,207 and an average annual growth rate of 0.46% (U.S. Census Bureau, 2005). Now, the post-war baby boom is presenting retirement pressures on pension systems and health care benefits. OECD Secretary General Donald J. Johnston has stated that countries that have pension systems that are insolvent or whereby the populace has insufficient personal nest eggs are facing  “… an unprecedented societal crisis…” (OECD, 2005). And this problem is an actual circumstance facing pensioners in the United Kingdom as the Pensions Commission has stated that “… millions of British workers face retiring in poverty unless they and the Government…” (Sydney Morning Herald, 2004) immediately undertake “… urgent action to meet a £57 billion annual shortfall…” that is resulting from the present levels of saving.

The pension system in the United Kingdom consists of the three-tiered methodology. Under the plan (Congressional Budget Office, 1999):

  1. Tier 1 provides a basic state pension,
  2. Tier 2 provides for mandatory earnings related pension, and if the employee decides to opt out of the governmental system the pension is provided by an employee sponsored scheme or a personal pension plan.
  3. Tier 3 is discretionary and basically consists of additional contributions to either the company, a personal pension plan or other form of savings the employee elects to utilize

Tiers one and two are financed by the National Insurance Fund, that receive proceeds from payroll taxes (Congressional Budget Office, 1999). The United Kingdom’s National Insurance Act, which was passed in 1946, provided for a basic state pension along with other social insurance provisions and the basic pension was established at a level that was slightly higher than a subsistence level (Congressional Budget Office, 1999). It called for employees who desired higher pension payout provisions to obtain additional insurance from private sources. The basic state pension is tied to indexation rules, which calls for increases to be tied to price levels (Falkingham et al, 2003).

During the period 1997 through 1998 a full basic pension provided £62.45 weekly (Congressional Budget Office, 1999). In order to obtain a full pension an employee needs to make what are termed ‘significant contributions’ for 90% of their working lives, which is determined as being between the ages of 16 through 65 for men and 16 through 60 for females (Congressional Budget Office, 1999). There is a proportional reduction in pension benefits for those who doe not meet the indicated stipulation and employees who do not meet the qualifications for the minimum 25% of a full pension payout are excluded from receiving any pension benefits (Congressional Budget Office, 1999).

The foregoing Labour Party approach addressed by Stewart et al (2004) who indicated that the Labour Party’s 1997 war on poverty resulted in the introduction of a comprehensive set of measures that were designed to counter poverty in old age as well as childhood. The principle component is the disparity means testing brought into the pension system and how it did not help the cause of lower paid workers whose benefit build up in the pension system was minimal, as shown under Charts 1 and 2. Evandrou and Falkingham (2004) expanded upon this work in drawing attentions to the contributions scheme and the gap that it indicated in later years thus attributing to a projected shortfall.

The government of the United Kingdom in 1975, under the Social Security Act, established SERPS, State Earnings-Related Pension Scheme, which supplemented the basic state pension. It permitted employees to ‘opt out’ of the scheme provided they are enrolled in an approved occupational pension or they establish their own private pension (Feldstein, 1998, pp 99-127). SERPS, as indicated by Chart 1, is subject to limits in terms of earnings and those employees earning either less or more than the stipulated £64 - £485 lower and upper thresholds do not receive additional benefits. The ability for workers to opt out of SERPS has resulted in the government of the United Kingdom lowering the revenue paid into the National Insurance Fund. 6 million workers by 1995, which represented twenty-five percent (25%) of the U.K. workforce elected to ‘opt out’ (Valdes-Prieto, 1997, pp. 277-317). During the period from 1988 through 1992 the government of the United Kingdom introduced an incentive program that encouraged workers to ‘opt out’ to private pension plans (Feldstein, 1998, pp 99-127), the effect of permitting employees to ‘opt out’ is shown by the aforementioned 6 million workers.

Recently, the government of the United Kingdom announced that as of April 2020 the state pension with regard to both men and women will be at age 65 and this change will be phased in gradually starting in 2010 (BBC News, 2005).  And there is also talk of raising the minimum retirement age to 70 as a result of the fact that more people are living longer lives and as a result spending more time retired and thus receipting retirement benefits (BBC News, 2005).  The indicated proposals are also driven by the negative effect of invested pension funds in the stock market whereby the yields have been under estimates.

The Stark Realities

The aging of the baby boom generation has resulted in the number of individuals above 60 represented almost 20% of those the age of 20 (National Census, 2006).  The foregoing represents the first time this has occurred, according to the findings of the latest census taken by the United Kingdom. More distributing and with critical implications for the future, the National Association of Pension Funds found that fully one-third of employees were not contributing to a pension (National Association of Pension Funds, 2006). 

The state of the pension system and the plight of retirees, both future and present, are further clarified by the following findings of research conducted by the National Association of Pension Funds. This survey indicated the following (National Association of Pension Funds, 2006):

1.    The majority of respondents indicated that they favor a flat rate state pension based upon the ‘Citizen’s Pension’ model.
2.    57% of the respondents indicated that they supported the scheme of a universal state pension that would pay out £109 weekly on the basis of citizenship. And further that the preceding not be accomplished as a result of National Insurance contributions that has limitations as indicated.
3.    80% of those interviewed stated that women should receive the same pension benefit amount as men regardless if the stayed at home rather than working.

The research suggested that the utilization of a Citizen’s Pension would help the government accomplish two of its primary objectives with respect to policy goals (National Association of Pension Funds, 2006):

1.    Encourage increased levels of savings for retirement,
2.    as well as an extension of working lives

The preceding was borne out as 51% of respondents who were of working age indicated stated that a universal pension would in fact encourage them to save more for retirement (National Association of Pension Funds, 2006).  Additionally, 42% indicated that such a development would also encourage then to continue working past the state pension cut off age (National Association of Pension Funds, 2006).

In addition to the preceding, the survey also uncovered that (National Association of Pension Funds, 2006):

  1. 94% of respondents indicated that they felt the government had the responsibility to provide for basic security for people in their retirement years.
  2. 57% supported the idea that all individuals should receive the same amount of pension benefits.
  3. 28% stated that they are in favor of a citizenship-based pension as it represented fairness and that all citizens should receive the same pension treatment.
  4. Respondents indicated that under a citizenship type pension that the period for residency in order to qualify should be at least 10 years, which was indicated by 19%, or 20 years, which was indicated by 30%.
  5. 51% of the people in the survey indicated that they would save more than present levels if a citizenship type pension was guaranteed to everyone and was paid for by the state.
  6. Over 25% of individuals below the age of retirement indicated that having a clear understanding as well as idea of how much they would thus receive from the state on retirement would result in them saving more then they do presently.
  7. And 42% of the respondents of working age stated that a citizenship type pension would encourage then to continue working past the present state pension retirement age.

The preceding information represents important insight as to reasons why the present pension system is not working, and more importantly the relative confusion concerning individuals as to their understanding the benefits, payouts and need to supplant savings levels.

The preceding findings are in the face of the pension crisis that has gripped the United Kingdom and is the source of public concern, the facts concerning the preceding are as follows (Sydney Morning Herald, 2004):

  1. In excess of 12 million workers in the United Kingdom that are presently over the age of 25 are not saving enough money to finance their retirement.
  2. The average person who is retired is facing a thirty percent (30%) cut in their state pension.
  3. Millions of workers in the United Kingdom are facing poverty levels unless urgent action is undertaken by the state to meet the £57 billion shortfall in annual levels of savings.
  4. As a result of the indicated shortfall, future pensioners will either face a thirty percent (30%) cut in income at retirement, or they will have to work until age 70 to be able to have the same standard of benefits as present retirees

The preceding facts are as a result of (Sydney Morning Herald, 2004):

  1. The general confusion over pension plan payouts by those who are in or near retirement age and their lack of taking adequate savings steps and provisions during their working span.
  2. The increase in baby boomers that are in or near retirement age.
  3. The subsequent drop in fertility rates that have vastly reduced the number of new entrants into the pension system thus affecting the formula calculations.
  4. The increase in inflationary rates that has not been offset by pension payout increases.
  5. Increased life expectancy of individuals that have affected the payout formula calculations.

Additionally, there are 11.3 million workers in the United Kingdom who are not presently making contributions to a private pension plan, and the foregoing includes 1.7 million workers who are self-employed (Sydney Morning Herald, 2004). The preceding information provides an understanding of the reasons as to why there are increasing numbers of pensioners that are destined for poverty in the coming years, as well as why such an occurrence is forecast.

Suggestions to resolve this crisis state of affairs have been proposed as follows (Sydney Morning Herald, 2004):

  1. Acceptance that the crisis is a fact and that pensioners in the future will be poorer than those of today,
  2. to increase taxes and or national insurance contributions in order to meet the existing shortfall,
  3. cut spending in other government areas to release the funds needed to fund the pension system,
  4. effect an immediate increase in private savings in the ranks of present and future generations, raise the age of retirement.

The government has been blamed for creating a confusing and “bewildering” (Sydney Morning Herald, 2004) system of state funding and means tested pension schemes that lulled the general public into having an incentive to save enough for their own retirements. The crisis in the United Kingdom is not an isolated example. The Population Reference Bureau (2005) has cited that increased longevity as well as early retirement as pension crisis factors facing all developed economies. The Bureau (2005) goes on to add that the foregoing points to a forecast indicating a doubling of the “… retiree - worker ratios in many countries over the next 30 years…” The concern regarding declining savings rates at the same time that the politicians of most governments have avoided the issue of increasing payroll taxes in order to fund the increased demands being made upon the system. The cost of public pensions is accounting for an estimated 15% of the Gross Domestic Product in many countries and the global consensus is that these systems, pensions, need to be revamped to be based more upon private accounts and the savings of individual workers rather than the traditional public benefit formulas (Population Reference Bureau, 2005).

The crisis is critical, and solutions to the present state of affairs demands intelligent actions be taken in order to stave off the real threat of poverty levels facing today’s retirees as well as those of tomorrow. In the United Kingdom, the ‘Minimum Income Guarantee’ (MIG) program is being utilized to aid “… 1.6 million pensioner-families …” stated Social Security Secretary Alistair Darling (BBC News, 2000). The latest figures on pensioners living in poverty shows the numbers as one in five, and that an additional 1.5 million are suffering from malnourishment or in risk of malnourishment (Daily Mail, 2005).

Conclusion

The picture of the plight of pensioners in the United Kingdom, as provided by the above information is bleak. The facts are that 20% of current pensioners are living in poverty, with almost two million more at the brink, and no solution to the problem actually being employed to reverse the situation. The discussions regarding increasing savings, increased taxes and raising the retirement age to 70 are solutions being discussed, but, no definitive actions have been taken save for discussions. The reality of increased life expectancy and the lower current day birth rates means that the number of individuals in the United Kingdom over the age of 65 will continue to increase from 28 percent to 48 percent in 2050. Thus, the number of pensioners destined for poverty will continue to increase unless drastic measures are taken, now!

The basis truth is that in a capitalist society, those who are no longer working are maintained by the taxes of those who are. And the foregoing figures showing the drastic reduction in the working percentage against those over the age of 65 is a simple mathematical problem. The closer Britain gets to the higher proportion numbers, the more drastic the measures that will be needed to correct the problem. Discussion today will cost more tomorrow, so the government needs to pull out its pencils and get the math right this time, as there is no time left. 

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