Pensions – Part 2

Retirement, the Third Age, entering the 3^rd Act or whatever you might call it has changed dramatically over the last few decades such that we can now expect to live far longer than those born a hundred years ago. Among men, life expectancy at birth increased from 50 in 1910 to 80 or so a century later, so if we assume that the 1^st Act – Birth and formal education has remained essentially the same and the 2^nd Act of ‘the BIG job(s)’ ends traditionally in the sixth decade but possibly much, much earlier, we might well live with purpose for another score beyond the 3 score and ten! This 3^rd Act/age and its duration are determined in part by luck but also having hopefully looked after ourselves in the previous decades. We, that is those beyond the mid-point of our life expectancy don’t have all the dilemmas posed by the ‘The 100 – year life’  We will however have to pay for it, or rather our children will. As we oldies take over the world, at least numerically (see Taboo #7 – Ageing – Part 1 – Demographics.) How will we do this – some ideas are outlined in Pensions Part 1 – It’s going to be a HUGE financial burden on society and how we manage this will be a reflection of the kind of society we are.

Pension History.

Widows’ funds were among the first pension type arrangement to appear, for example Duke Ernest the Pious of Gotha in Germany, founded a widows’ fund for clergy in 1645 and another for teachers in 1662. ‘Various schemes of provision for ministers’ widows were then established throughout Europe at about the start of the eighteenth century, some based on a single premium others based on yearly premiums to be distributed as benefits in the same year.’

In Germany as part of Otto von Bismarck’s social legislation, the Old Age and Disability Insurance Bill in 1889. The Old Age Pension program, financed by a tax on workers, was originally designed to provide a pension annuity for workers who reached the age of 70 years, though this was lowered to 65 years in 1916. At this time an adult entering into insurance under the scheme would on average live to 70 years of age, a figure used in the actuarial assumptions included in the legislation.

Until the 20th century in the UK, poverty was seen as a quasi-criminal state reflected in the Vagabonds and Beggars Act 1495 that imprisoned beggars. During Elizabethan and Victorian times, English poor laws represented a shift whereby the poor were seen merely as morally degenerate, and were expected to perform forced labour in workhouses.

The beginning of the modern-day UK state pension was the Old Age Pensions Act 1908, that provided 5 shillings (£0.25) a week for those over 70 whose annual means did not exceed £31.50. This when the census of 1911 spanning the years of 1910-12 estimated life expectancy as being 51.5 years for men and 51.35 years for women.

After the Second World War, the National Insurance Act 1946 completed universal coverage of social security. The National Assistance Act 1948 formally abolished the poor law, and gave a minimum income to those not paying national insurance.

In the USA public pensions got their start with various ‘promises’, informal and legislated, made to veterans of the Revolutionary War otherwise known as the American War of Independence (1775–1783) and, more extensively, the Civil War. (1861 to 1865) They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era a period of widespread social activism and political reform across the United States that spanned the 1890s to the 1920s. The main objectives of the Progressive movement were eliminating problems caused by industrialization, urbanization, immigration, and political corruption.  in the late nineteenth century.

Federal civilian pensions were offered under the Civil Service Retirement System (CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the US Federal government, until the creation of a new Federal agency, the Federal Employees Retirement System (FERS), in 1987.

Pension plans became popular in the United States during World War II, when wage freezes prohibited outright increases in workers’ pay. The defined benefit plan had been the most popular and common type of retirement plan in the United States through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.

A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In many developed countries this means that government and public sector pensions could potentially be a drag on their economies unless pension systems are reformed or taxes are increased. One method of reforming the pension system is to increase the retirement age. Two exceptions are Australia and Canada, where the pension system is forecast to be solvent for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These two nations also have an advantage from their relative openness to immigration: immigrants tend to be of working age. However, their populations are not growing as fast as the U.S., which supplements a high immigration rate with one of the highest birth-rates among Western countries. Thus, the population in the U.S. is not ageing to the extent as those in Europe, Australia, or Canada.

Another growing challenge is the recent trend of states and businesses in the United States purposely under-funding their pension schemes in order to push the costs onto the federal government. For example, in 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. Bradley Belt, former executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans in the event of bankruptcy), testified before a Congressional hearing in October 2004, “I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort.”

Challenges have further been increased by the post-2007 credit crunch. Total funding of the nation’s 100 largest corporate pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008.

Retiring Retirement BBC Radio 4 – In Business – August 2018 – This is an interesting and well worth a listen. Producer: Arlene Gregorius.

Life expectancy is going up, pensions are declining. Meanwhile the official retirement age has been abolished, while the age at which you can draw your state pension is rising. As a result, more and more of us will have to work until our 70s, or even our 80s. So, asks David Baker, is this the end of retirement?

That may not be as bad as it sounds. For In Business, David meets people who could live a quiet, retired life, but choose not to. One founded a bikini company in her 70s, others sell vintage goods, or left organisations to set up on their own. For them, the very word “retirement” is negative, they love what they do, and wouldn’t want to give it up.

Experts say that most of us will need to work into old age. Professor Lynda Gratton tells David that the previous life pattern of education-work-retirement will have to yield to a multi-phase one of different careers, broken up by breaks, even late-life gap years, and re-skilling. Why retire at 60 if you could live to 100?

The government, too, wants a million more over-50s in the workplace by 2022 – but not all employers are playing ball. Without the prospect of older staff leaving at a fixed retirement age, bosses are making them redundant instead, including by ugly means, and before they can draw a pension. Some companies though do value older people’s skills and experience, and even take them on as apprentices. Until more organisations do this, however, it may be up to us to take matters into our own hands and prepare for a long working life.

Q1. Are you prepared to work longer, pay bigger pension contributions and possibly receive less?

Q2. What does history tell us? Will our politicians look after us in our dotage? 

Q3. If we are to work for a decade longer than expected what jobs will there be for us?