Why The Pensions Crisis Is Even Worse Than You Think It Is

Vernon Coleman

In the EU today the average age is around 39 years. By the year 2050 the average citizen will be around 50-years-old. Over half the population will be over 50 and nearly a third will be over 65. A survey conducted by Deutsche Bank reported that by 2050 there will be 75 pensioners for every 100 workers in the EU. (There will, of course, also be many people who are younger than this but who are, for a variety of reasons, unwilling or unable to work.)

These fundamental demographic changes are being produced by reduced infant mortality rates and, most importantly, by falling birth rates. Back in the 1960s there were many scare stories about the population time bomb and couples were encouraged not to have more than two children. More significantly, however, the cost of raising more than two children has become an intolerable burden for those who have to earn a living and pay taxes. In modern England, and indeed in much of modern Europe, only those who live on State handouts are able to feed and care for more than two children. (The State is, therefore, ensuring that future generations will largely be composed of the lazy, the feckless and the incapable.) Women are having children later and are leaving longer gaps between children. These changes are not due solely to increased life expectancy. (See my book How To Stop Your Doctor Killing You for an explanation of this.)

This dramatic ageing of the European population will have a dramatic impact on the potential for economic growth and on the demand from pensioners for financial support and for health care.

Since state pensions are paid for out of current tax revenues (and are no better than illegal Ponzi schemes) either taxes or national debts will have to rise steeply. Standard and Poor's (a credit-rating agency) has predicted that France and Germany, the two EU countries with the most serious pension problems, could see their public debt grow to more than 200% of GDP by the year 2050. This would clearly be unsustainable. (It is hardly surprising that the other EU countries are loathe to see England leave the EU. Far more private pension money has been saved by the English than by any other nationality. The EU wants to share those savings and England's accumulated pension funds are likely to be raided by other European countries on the grounds that when the EU is a single state so savings will become community property.)

Our politicians don't seem to have grasped the awful significance of the changes that are coming. We will need fewer schools and more old people's homes but our politicians are busy building more schools and because of EU regulations we have fewer old people's homes than ever. Youthful spenders will be replaced by middle-aged savers desperately trying to accumulate a little money to help ease their way through old age and to help pay for medical and dental care. The number of workers struggling to pay the costs of all those receiving sickness benefits and all those receiving pensions will fall lower and lower. The working classes who had become the middle classes will become the working classes again; they will work harder than ever, earn less than ever and pay more tax than ever. (State employees don't count as contributors since they too are a drag on the economy. Their salaries and pensions must be paid out of the earnings and taxes paid by the diminishing number of private sector workers.)

I first warned of this problem in 1988 (in a book called The Health Scandal - see a previous item in this book) but European politicians either didn't see what was coming or else they kept their eyes averted because they couldn't bear to look.

Now, however, it is no longer possible to ignore the impending crisis. (Actually, it's too late. It is now up to each and every man and woman to look after themselves. Anyone other than an ex-MP or ex-civil servant who relies on the Government to provide for them in their old age will spend their final years cold and hungry. If England manages to get out of the EU taxes are going to have to rise dramatically. If we stay in the EU taxes are going to have to rise far more than dramatically as English taxpayers struggle to help pay the pension deficits in France and Germany.)

Sudden (and belated awareness) of this looming disaster helps to explain much of what is now going on in Europe.

It is because of this problem that European governments are desperately (though unsuccessfully) trying to reform their pension schemes. And it is even because of this impending crisis that legislation has been introduced giving older workers more protection. (The EU needs private sector employees to carry on working well into their seventies. The new legislation is designed to ensure that employers cannot discriminate against employees on the basis of age. State employees, public sector workers will, of course, still be entitled to retire as early as 55 and will continue to receive generous taxpayer-funded pensions. Many, having time on their hands, will take up part-time jobs. They will be able and prepared to accept low wages and will threaten still further the financial security of many, particularly the self-employed.)

When Labour came to power in 1997, England's pension system was in good condition. The State pension system was affordable and one of the best in the world. Pensioners' incomes had risen faster than wages. Britons had more money saved privately for their old age than citizens of any other EU country and, possibly, any other country in the world.

But things have changed for the worse.

The nation's pension fund is actually a huge debt. The insurance you pay isn't insurance at all. It's just another tax. The money you pay into a Government sponsored scheme so that you will have an enhanced state pension isn't a pension contribution at all. It's just another tax, which goes into the pot to pay for the wages and pensions of nearly 6 million civil servants, 1 million unemployed and 3 million long-term sick. The money you think you're paying towards your state pension isn't being put on one side for your retirement. It is being used to pay today's bills. The Government is running an entirely fraudulent pension scheme. If the Government was a pension company all the directors would be in prison. It's hardly surprising that Blunkett has warned that people will, in future, have to work until they are 70 or even longer, before they can receive a state pension. (Unless they work for the Government, of course. Firemen can start drawing their pensions at the age of 50. Policeman can retire at 55. Civil service bureaucrats can retire on a full pension at 60. And politicians can retire whenever they want.)

Non-Government employees who retire in a decade or two (and who rely on the state pension) will, if we remain in the EU, receive less from their Government than citizens of any other EU country. Those Britons who rely on Government pensions in 20 or 30 years' time will live in poverty. England's pension system is in a mess. Labour has turned one of the best pensions systems in Europe (and the world) into one of the worst. A survey by the Clydesdale Bank found that of 1,000 people questioned over 600 said they hoped to win the lottery to pay for their retirement.

Private pensions are in as big a mess as the State's own fraudulent pension scheme. Liabilities have rocketed and assets have shrunk. Schemes that were well-funded less than a decade ago are now in deficit. In a vast variety of private pension schemes there are huge gaps between the value of pension assets and the value of pension liabilities. The safety and security of corporate schemes, once taken for granted, is now questionable. The value of private schemes is widely doubted. Trust has gone.

There are several reasons for the mess.

First, the collapse of the stock market in the year 2000 destroyed much pension fund value. But this is something that happens from time to time. And those who invest in pensions have had to face this problem ever since pensions were first devised. The difference this time was that a great many company pension schemes were over-invested in (and over-exposed to) the stock market.

Most companies had their funds largely invested in fairly high risk equities in the hope that the bull market of the 90's would continue for ever, thereby ensuring that the pension fund didn't need topping up with company money. Sadly, although equities can be profitable they can, when the market goes in the other direction, result in huge losses. Forcing public and private companies to provide pensions for their employees was a fundamental error. Labour, obsessed with taking authority but passing on responsibility, has made things infinitely worse through its introduction of compulsory stakeholder pensions. Occupational pension schemes in England are, according to one investment bank, underfunded by 54 billion. This means that hundreds of big companies have huge debts to their own pension funds. These debts will be a burden on growth and investment and dividends, and which will help to hold back the stock markets (and therefore damage pension funds still further) in the future.

Many large companies are now working not to earn money for their shareholders but to earn money to pay today's and tomorrow's pensioners. Many big companies are now effectively hedge funds, running a business on the side. The trouble is that the people running the `hedge fund' really don't have the foggiest idea what they are doing. In many cases the company pension scheme is bigger than the business and in numerous cases the pension fund's deficit is far greater than the company's assets. You may think your firm is an airline or a telecommunications company but in reality it is probably an investment company - heavily invested in, and dependent upon, retailers, mining companies and other airlines or telecommunications companies.

It isn't possible, by the way, to avoid this problem by investing overseas for the pensions problem is also affecting the USA. General Motors, the world's biggest company, now only has one active worker for every 2.5 retired ex-workers receiving a pension. The fixed cost of paying pensions to 420,000 former workers is rapidly destroying the company. Providing health care insurance costs another $5 to 6 billion a year. It is hardly surprising to discover that as long ago as a decade ago the non-executive chairman of General Motors announced that the main role of the company's Chief Executive Officer was not to boost the share price or increase shareholder value but simply to `sustain the enterprise'. As Fortune magazine concluded the implication was that General Motors true mission is `to provide jobs for its employees, business for its suppliers, cars for its dealers, and pensions for its retirees'. Hardly a sound investment for others looking for a good, long-term investment.

Second, the Labour Government has introduced a bizarre pensions credit system which actively discourages saving. Obsessed with means-testing, Labour politicians have introduced a form of means-testing for pensions which means that those who spend their money are better off than those who bother saving. (It has to be said that means-tested pension plans are deliberately so complex that only the long-term unemployed - traditional users and abusers of the system - know how to use them properly. Nearly two million of the poorest pensioners do not claim their entitlement.) Is it any wonder that most people don't bother to save anything? Even non-pension savings have taken a dive. The English now save less than 5% of their income - less than half the amount saved by the French, the Germans and those devil-may-care spendthrifts, the Italians.)

Third, a surprising number of pension scheme managers turned out to be incompetent or devious and the Government's own watchdogs turned out to be toothless and unable or unwilling to bark out warnings. Three of the safest investments at the turn of the millennium were Equitable Life, zero dividend preference shares and Railtrack. Much of the money entrusted to Equitable Life was lost through the incompetence of those managing the company. Publicity about the Government's theft of Railtrack and the fraud (inspired by traditional, old-fashioned greed and dishonesty) which robbed investors in safe zero dividend shares of millions of pounds of their savings all damaged the enthusiasm of savers. Investments in Railtrack were lost when the Government simply stole the company from shareholders for political reasons.

The Government did nothing to prevent these disasters (though it should and could have done) and it has, subsequently, done nothing to compensate those who lose their savings (though it should have done since the companies involved were all regulated by Government watchdogs paid for by investors and taxpayers). The Government regulators and watchdogs (the ones which imperil your personal financial security by insisting that you entrust your passport, your driving licence, your latest bank statement and a selection of gas bills to the post if you want to open a new bank account) did nothing to stop these thefts and frauds.

It is hardly surprising that a recent survey showed that 34% of adults are failing to save anything for their future. Since a growing number of young people are, in the future, also going to have to pay off student loans (together with the interest, of course) this situation seems certain to deteriorate. The number of people in serious debt and the number filing for bankruptcy have both reached record levels. Even people who have a little money, don't trust anyone in the financial industry to handle it for them.

But it is the fourth and final reason which is really behind the crisis.

In his very first budget in 1997, within days of taking over the chauffeur driven car, the Chancellor of the Exchequer, Gordon Brown, introduced a tax change which took 5 billion a year out of private pension funds. This raid on the funds of people who had been foolish enough to save for their retirement was hailed by Labour's enthusiastic supporters as a clever way to raise more money to pay for more public sector jobs for Labour voters, but at the time I wrote an article pointing out that the new tax would decimate pensions and create a crisis. That is, I'm afraid, exactly what has happened.

It was Brown's mean tax-grab which has destroyed private pensions and created a huge disparity between those who will rely for their pensions on corporate or private schemes and those who work for the Government and whose guaranteed, index-linked pensions will be paid by future taxpayers.

Brown's tax-grab effectively divided the nation into two. Between 1997 and 2005 Brown took 40 billion out of private pension funds. That is almost exactly the current shortfall. Labour's crude and selfish polish was to buy votes with taxes taken from pensions. At the time most commentators were desperately in love with Blair, Brown and the Labour trickery and were far too stupid to see the possible consequences. I believe that Brown, who likes voters to think of him as `prudent', has seriously damaged the pensions of far more people than Robert Maxwell, and has also done far more damage to the trust and enthusiasm of citizens for contributing to their pensions than Maxwell ever did. Brown's legacy will be several generations of impoverished people. So much for prudence.

The Government's failure to protect investors, its failure to compensate those who invested and were cheated out of their savings, its greedy grab at private and corporate pension funds and its introduction of a nasty form of means-testing designed to punish those who have been prudent and have saved and reward those who have no savings, all mean that it is hardly surprising that people are no longer saving for their old age. The Government has told people that it is foolish to be prudent, and people have listened. Savers have become spenders.

As I have already suggested, the only people with really reliable pensions are the people who work in or for the Government.

MPs recently voted themselves a 25% increase in their pensions. When they discovered a 25 million black hole in their retirement fund they simply filled it in with taxpayers' money. Simple. MPs, like the millions of Government employees hired to ensure Labour stays in power, have copper bottomed index-linked futures. Greed and theft and dishonesty are the principles upon which Blair and his chums run the country. When Blair's old chum Derry `wallpaper' Irvine left office he did so with a taxpayer funded pension pot worth 2.3 million. (If you or I managed to save that much in our pension pots we would be penalised by the Inland Revenue because the limit for citizens who aren't Blair's chums is 1.5 million.) Two lawyers drew up a scheme to exempt senior judges from the ceiling on tax exempt pension savings. The two lawyers were the Prime Minister and his former flat mate, Lord Falconer.

It is, perhaps, not surprising that in April 2005 the then pensions minister, said he did not think that England had a pensions crisis. This was true enough for State employees in general. And it was particularly true for a man who had a generous, guaranteed index-linked pension, paid for by taxpayers.

At approximately the same time the Association of British Insurers reported that 87% of the working population said they did not trust the Government not to let them down on pensions. The pensions of MPs, judges, and senior civil servants are all guaranteed by the taxpayer. Bizarrely, they are funded at a total cost which far exceeds the level allowed to ordinary members of the public who are paying for their own pensions. Moreover, the pensions of the nation's leaders are index-linked (at tax payers' expense). At a time when most of the privately employed citizens can no longer afford decent pensions (and are banned by the 2006 pensions legislation from putting as much into their pension funds as they might wish) it is a brutal scandal that judges and politicians should award themselves such generous, index-linked pensions. It is yet another example of the new class system which Labour has created.

(No one has yet explained why the Government's scheme to punish (with extra taxes) private pension holders who save hard and accumulate more than 1.5 million in their pension funds, but to exempt civil servants and politicians who have more than 1.5 million of public money in their pension pots, is not in breach of that part of the Human Rights Act which decrees that all citizens must be treated equally.)

The potential cost of providing pensions for an ever-increasing number of State employees is rocketing.

State employees get their pensions from a Government sponsored Ponzi scheme. Their pensions are underwritten by taxpayers but unlike private pensions (where the contributions are put into an invested fund) State employees get their pensions out of that year's tax revenue. The growing number of State employees, and the growing size of all those index-linked pensions, means that taxes are going to have to rise, rise and rise again. Private sector employees, whose own pensions have been destroyed by the Government's tax grab, and whose own futures are dim, are hardly likely to be pleased at the prospect of paying ever higher tax bills so that traffic policemen, tax collectors and incompetent Government ministers can be maintained in luxury in their retirement.

Workers who are employed by the State receive pensions which are, on average, 20% higher than people working for private companies. The public sector pensions bill costs taxpayers around 18 billion a year and to fund the pensions of current State workers and those already retired would cost 580 billion. How would you feel if you were told that you had to find 10,000, walk into a Government building and hand it to a civil servant for his personal use? Whether you work for the Government or not, the amount you will have to pay for the pensions of Government employees is around 10,000. You will, of course, also have to find the money to finance your own pension. And Government employees will not be supporting you. The cost of funding over-generous pensions for state employees is one of the reasons for ever rising taxes. It is also one of the reasons why local authorities are charging ever higher rates and providing constantly deteriorating services.

In April 2005 local authorities in England and Wales revealed a 30 billion black hole in their pension funds. The deficit has risen dramatically in the last few years (it was a relatively small 6.3 billion just four years earlier) and seems certain to continue to rise at a frightening rate. Local authority employees simply threaten industrial action every time politicians hint that some sort of action will need to be taken to limit a system of accounting that would have had Mr Micawber weeping. In 2004 around a fifth of all the money raised by local councils as rates payments was paid directly into pension funds.

If your annual rate bill is 1,000 then you are paying 200 of your own after-tax income towards the pensions of former council workers. Even if the situation remained stable it would take local authorities around 21 years to make up their pension deficits out of income. Since the situation isn't going to remain stable (it is deteriorating rapidly) it is patently clear that the future for rate payers is bleak. (Bizarrely, and almost unbelievably, many councils are deliberately making things worse for their ratepayers. More than 90 councils have now set up new pension schemes for their councillors. There was a time when councillors regarded their work as a civic duty and a privilege. Today, it is increasingly regarded as yet another well paid branch of politics. The provision of pensions for councillors can only deepen the coming pensions crisis in local government. This extra burden will be about as welcome as an ice-making machine during the last hours of the Titanic.)

In early 2005 the Labour Party announced plans to raise the minimum retirement age for local authority workers from 50 to 55 but backed down after five unions threatened to go on strike to defend the present system. There is something quite cruel about a situation which allows council workers to retire at 50 (paid by tax payers) while tax and rate paying employees with private pensions (paid out of their own savings) or tax and rate paying employees retiring on state pensions (paid by tax payers) are being told by the Government that they must work well into their 70's before they can expect to retire.

Feb 10th 2006
Copyright Vernon Coleman 2006

Taken from The Truth They Won't Tell You (And Don't Want You To Know) About The EU by Vernon Coleman, published by Blue Books. Available from the shop on this site and from all good terrestial and web-based bookshops.