A Ponzi scheme with a legal fig leaf

We continue to fight Coronavirus day-to-day at huge direct costs to the taxpayer for healthcare and business support schemes, and indirect cost to our economy. This will create many new liabilities, piling onto existing commitments.

For example, the size of the implied pension pot required to fund pensions is already gigantic. I say implied because we all know that for many of these pensions there is no pot of funds. Our pensions, funded through so-called ‘national insurance’, are a Ponzi scheme with a legal fig leaf. We ask everyone to commit funds today for the future. But we are not saving those funds, we are spending them right away. We will then ask future taxpayers to fund our pensions with new pounds. If you were to sell an insurance or investment product on the market with these features you would be put in jail. 

The liabilities are particularly bad in the public sector. A senior civil servant with 40 years service and a final salary of £150k looks forward to about two thirds of their final salary in a pension. Many of these legacy pensions also had the right to transfer the pension to their wives (or husbands). Crikey Moses – at today’s annuity rates such a pension would require a pot of about £2.6m. Accumulating this pot would require quite phenomenal contributions – using an online calculator this equates to saving £30k per year from the age of 20 even with a 5% return on investments. Put into perspective, this would be equivalent to a new starter receiving about 100% of their salary as a pension contribution. Not only is it unlikely that a young person could ever save this sum, but the life time tax allowance of only £1m means that much of the accumulation would be subject to taxation.

So perhaps it is not surprising that the Ponzi scheme has been shut for almost everybody. However, with about 4 million UK citizens over the age of 75 – even the death of some older people from COVID is unlikely to solve the inherited pensions problem.