Transforming personal finance since 2011

#7 — Pensions vs. Brexit


May 30th, 2016

By Andrew Craig

Reading time: ~ 5 minutes

To date, I have been reluctant to wade into the Brexit debate for one primary reason: I believe it is simply too hard to predict with any degree of certainty what the real ramifications of either staying or leaving are for this country. I have a few ‘gut feels’ about it and some ‘soft’ thoughts - I can’t, for example, get my head around the idea that my numerous European friends in London would have to apply for a visa after living and working here for so many years and it would feel really odd to me to treat them as ‘aliens’ (as the Americans like to say). In addition, I dread the idea of one day having to go through the horrendous administrative pain I went through when I moved to New York a few years ago if I feel like living somewhere lovely in Europe for a while some time in the future.

As I say, these are secondary issues (although still important at a personal level). When it comes to the hard-nosed economic consequences of Brexit, none of my thoughts on what may or may not happen could currently be said to be based on cold, hard evidence and dispassionate analysis and I need to do more work in the next three weeks. This is compounded by the fact that both sides of the debate have seemed entirely comfortable from the start with trotting out pure nonsense followed by bare-faced lies followed by hilariously ridiculous economic ‘forecasts’ and the largely ill-considered, tabloid rubbish that gets posted on sites like Facebook both for and against.

Osborne and the Treasury are currently claiming Brexit ‘could cost pensioners £32,000’ whilst the ‘leave’ camp claim ‘new EU rules will cost British pensioners £400bn’: Both statements are about as much use as a chocolate fireguard and we must not take any of these sorts of statements seriously.

We should all know by now that the only accurate economic forecast you can ever make is that most economic forecasts are inaccurate. (George Soros cleverly explains this reality by suggesting that one of the reasons for it is that forecasts themselves change what the economy does, rendering those forecasts incorrect - a financial version of what physics calls ‘the observer effect’).

If you held a gun to my head and asked me my honest view on Brexit now, even before I’ve done the work on it that I allude to above - my answer would be that it probably won’t matter that much either way (shock, horror). Every year I become a more ardent subscriber to what you might describe as ‘the muddle through hypothesis’. Time after time, things that we believe could be incredibly problematic actually just aren’t. Go back and read some articles about the millennium or ‘Y2K’ bug: Planes were going to fall out of the sky, banks would stop working, nuclear power stations would unilaterally go into meltdown blah, blah, blah. What happened? Human ingenuity won the day and nothing really happened. We muddled through. Evolution not revolution. Although Norman Lamont and John Major had a fair few sleepless nights when Britain came out of the ERM in 1992 - as an economy and as a society we muddled through and soldiered on and even bounced back with our newly smashed currency.

Future pension policy or, more accurately, ubiquitous financial literacy - will be far more important than Brexit!
As I have written many times before, the average British person today has a literally disastrous £30,000 saved by the time they retire. At current annuity rates, this implies that that average person can buy around £100 a month of income for the rest of their life (if they’re lucky and get a particularly good deal). Put another way, they could fund just over one year of the more like thirty to forty years they’re going to want / need to fund at only just above the UK average annual salary. Make no bones about it, this is a massive national disaster given far too little oxygen by our press and politicians and vastly more significant than Brexit.

Anything more than this pathetically small sum has to be made up by a state which categorically can’t afford to fund the gap in the decades ahead given the parlous state of our national finances and the demographic reality of far too many people at retirement age and far too few who are economically productive. This is a personal disaster for literally millions of people which has started already. ‘Hanging on in quiet desperation is the English way’ is a Pink Floyd lyric which most certainly describes a growing percentage of the adult population in the UK struggling to simultaneously care for and fund both children and elderly relatives who have insufficient resources to fund their own retirement and often significant healthcare costs. You probably know people in this predicament but you don’t see much written about it - it is just too depressing.

As a nation, what we need as a matter of REAL URGENCY is for the British population to understand, in no uncertain terms, that it is a mathematical impossibility for the state to fund everyone’s healthcare and income needs for the last thirty or more years of their life. The UK pension was created in 1909 for the over seventies in an era when hardly anyone lived to seventy, let alone past seventy. Today people want to stop working in their sixties and then have the state pay them a living wage and fund their healthcare requirements for two, three or even four decades. No matter whether you are left wing or right wing, Labour or Tory, this is simply impossible and no matter what happens with Brexit.

Adding large numbers of economically unproductive people with no ingrained culture of saving to our welfare rolls does, of course, exacerbate this problem - but this seems to have happened with or without immigration. Plenty of British people seem to have just as awful a grasp of why this ‘boring pension stuff’ is important as the various immigrants who have never heard of it before because it has never existed where they come from (a key factor in why their economies and societies are a disaster by the way - more on that another day).

What we must do is ensure that everyone in this country understands enough to take personal responsibility for their own financial situation. We need to foster a real understanding of money and how money works and we need to do it NOW. I’ve outlined the bad news above. The good news is that it actually isn’t that hard for people to achieve the necessary result here, even for people on a relatively low income. Far more important than our relationship with Europe for the rest of our lives will be that we succeed in this endeavour.

Right. I’m off to read ‘The Trouble with Europe’ by Roger Bootle - one of several books I feel I should read before I am qualified to cast a vote in this referendum…