Andy Haldane – pension ignoramus?

Everyone’s favorite pension quote is Andy Haldane’s admission he was not “able to make the remotest sense of pensions“. If the chief economist of the Bank of England is baffled, then the stigma of our not “getting pensions” is a little easier to bear.

Another economist has tried to make sense of pensions.

pension cuts always seem to get people to the streets. but the retirement people expect never actually existed https://t.co/A5y3Uc9TLB

— Allison Schrager (@AllisonSchrager) December 31, 2019

Allison Schrager is an American economist who writes stuff that I can understand. If I can understand it, so can you! She challenges our received ideas .

This blogpost challenges the assumption that there was a golden age of retirement which has left us with a $400tr shortfall in assets to meet future expectations. Her argument is that we’ve extrapolated the retirement income enjoyed in previous decades by those few enjoying DB lifetime incomes, to everyone. We’re making people feel bad about not having what they could never have expected.

She argues that economists have  created an expectation of universal comfort in retirement that isn’t met by American DC plans, Chilean DC plans – and by extension UK DC plans. This is small wonder (she explains), the cost of securing a full replacement ratio is beyond Government – let alone employers and least of all ordinary citizens.

People making their own way home

According to Schrager’s numbers, the average American with a retirement plan heads out of work with $300,000 pouched in retirement savings, which is higher than in the UK but likely to be rather less effective in paying the post-retirement bills than over here. Schrager estimates the  average American has $183,000 more in later-life medical bills than can be covered by their Medicare system.

But not all Americans have a retirement plan and accross the board, the average American only has $20,000 in retirement savings in 2016, happily  up from $9,000 25 years before but pitifully low to meet expectations of retiring  on a comparable standard of living – people had in work. Taken together, the low level of savings and the higher costs of healthcare, make for an unappealing cocktail for the average American. While they may not be rioting as they have been in Chile, or striking as they are in France, the citizens of western democracies like US, UK and even Australia, should be thinking of the future without the expectations of a 2/3 replacement ratio.

That is Schrager’s point and it is interesting to consider whether the social consequences of removing DB from the UK pensions system will be as benign as Schrager says they have been in the US. It’s a variation (for non DB beneficiaries) of “if you ain’t got nothing, you ain’t got nothing to lose”.

There remains, however, an expectation created by “experts” that the three pillar OECD pension system will provide by now, a retirement plan for most of us. That expectation is not being met and people are having to make their “own way home”.

Adapt and go

When I look at how people adapt to a post-work environment, I see a lot more going on , than “meets the eye”. What meets the eye is the bald statistic that the average Brit reaches retirement with combined retirement savings of around £35,000. If this was all we had to live on, then we wouldn’t get close to the Retirement Living Wage, promoted by the PLSA.

Which is why modern-day retirement plans are a lot more sophisticated than some economists tend to thing (I’m excluding Schrager from that slur – and a few others!)

What most people do when they get to retirement is to work out how much work they can afford not to do , not assume they are stopping work. Most people go down in days worked and use pension savings to take up the slack.

Some people do some longer term cashflow modelling, tying to work out how things will change when their state pensions cut in. Some are sophisticated enough to work out what they can get from the state from “Universal Credit” and others start thinking how they can convert liabilities (like housing) into income producing assets.

Getting it wrong

In short, people look for ways to turn the disappointment on learning that their pension savings aren’t going to be enough, to relief at working out out alternatives. Listen to the stories of those who are scammed out of their retirement savings and almost all of them involve them trying to resolve the shortfall issue.

This process of adaption makes people vulnerable, sometimes they feel able to take financial decisions that impact the rest of their lives , with  little proper support, the scammer can provide the fake support at a time of vulnerability. We liken the period of adaption to navigating the strait of Hormuz.

Relatively few people get it horribly wrong, which makes the cases of those who do, good reading for those who don’t (witness the current string of pension scam articles in the Daily Mail).

However the numbers of people getting it wrong, looks to be dwarfed by the number of people not getting it very right.

Not getting it very right

One of the most bizarre aspects of “austerity” has been the low take up of benefits.

Of the various income-related benefits on offer , pension credit is the least claimed.

This may not amount to a scam, simply a matter of people not getting to know their entitlements. But the onus on promoting the entitlements varies depending on to whom you talk. To those who believe in self- sufficiency, low take up is an example of poor research, to those who consider benefit provision, the responsibility of the state, the problem is with Government.

Either way the problem exists and it’s a problem that no-one is talking much about.

The stigma of not knowing enough….

Returning to Allison Schrager’s argument, I suspect that for many middle class people living in Britain today, the chief emotion they have when thinking about the future is guilt.

People are always getting embarrassed by their ignorance about pensions and I suspect they are much more ignorant about benefits. People are also scared or embarrassed to ask. When my father died, my mother – who was entitled to half his pension, waited a year – to a point where she had no more money – before asking me what she should do. The matter was sorted in  a few minutes via a phone call, a backdated payment was made and she now gets her dues.

And yet many pension benefits like my Mum’s are never paid. We know from the PPI that there are around £20bn of unclaimed DC assets and I would be surprised if there weren’t unclaimed DB liabilities amounting to the same. It is not just the Government that is “getting away with it”.

But the question of “onus” remains. It it incumbent on those with promises of money to pay, to find beneficiaries or is it the other way round? Lost pensions or pensioners that can’t be found?

Comes from the stigma of not having enough

I am of the view that the financial services industry has created an expectation that people will be looked after by the retirement savings plans they join and that people do not understand why this expectation is not met at retirement. In truth, it was the expectation that was wrong and what is compounding the problem is the inability of these financial services companies to come clean.

People are therefore feeling bad about themselves for not saving enough and ending up feeling too guilty and embarrassed to claim their income benefits (wherever they arise).

We are in danger of shaming a generation into feeling they are financial failures.  The point that Allison Schrager is a good one, but it needs to be extended.

Not only were the expectations given our generation wrong, but these expectations are still being promoted. Hutton’s famous formulation, “save harder, work longer or expect less” missed one further instruction “ask for help”.

The stigma of asking for help, with pensions, benefits, lifetime mortgages and healthcare results in poor decision making and unnecessary hardship.

Have we created a stigma about asking for help on pensions?