Many will be hitting the buffers this year
Inflation is at a thirty year high. It will hurt the poor much harder than the rich. This is why.
Woke up this morning to the radio talking about the cost of living rising a further 5%. It infuriates me the index that they use for this calculation, which grossly underestimates the real cost of inflation as it happens to people with the least. Allow me to briefly explain.
— jack monroe (@BootstrapCook) January 19, 2022
Baked beans: were 22p, now 32p. A 45% price increase year on year.
— jack monroe (@BootstrapCook) January 19, 2022
Bread. Was 45p, now 58p. A price increase of 29%.
— jack monroe (@BootstrapCook) January 19, 2022
A bag of small apples. Was 59p, now 89p (and the apples are even smaller!) A price increase of 51%.
— jack monroe (@BootstrapCook) January 19, 2022
Peanut butter. Was 62p, now £1.50. A price increase of 142%.
— jack monroe (@BootstrapCook) January 19, 2022
The system by which we measure the impact of inflation is fundamentally flawed – it completely ignores the reality and the REAL price rises for people on minimum wages, zero hour contracts, food bank clients, and millions more.
— jack monroe (@BootstrapCook) January 19, 2022
The real cost of living for those for whom these items are part of a staple diet has increased by more than inflation , which is why the poor will suffer from food inflation more than middle and upper class people (you and me). People who have the time and education to read my blogs are not worrying for themselves (but I hope they are worrying for others).
In little more than two months, energy bills will rise by 50% and we know that the poorest over-pay on energy too.
In that same month, the state pension will go up by 3%. By the time we count in fuel price increases, that could mean benefits-dependent pensioners getting a real pay cut of 5% or more. Unlike us, people who spend their income have no buffer for pay cuts like this.
For those who spend all of there income, there is no buffer.
We talk about buffers in pensions all the time. We want to build in contingencies to protect incomes from falling (we call it prudence). It’s a marketing thing, it makes products and services more appealing as we can promise no nasty surprises.
But if you are spending what you are earning there is no buffer when prices go up and pensions go down (and the state pension will go down in terms of CPI, more in terms of RPI and even more in terms of Jack Monroe’s food basket.
Financial products are not built for everyone. Just look at the way we have ignored the cost of pensions for the 1.7m low paid who have not been given savings incentives because they were in the wrong kind of pension scheme. It will take 10 years of campaigning to get them any redress and then the redress will only be going forward.
We talk of the importance of advice but paying for advice is way beyond the budget of people on low earnings. We tell these people to have an interview with Pension Wise to understand the difference between annuity and drawdown products, but if you are living hand to mouth, you aren’t buying drawdown or annuities, you want an increase in your retirement income, a top-up to your income whether through wages , benefits or from whatever your pension savings can give you.
Many people think that it isn’t worth paying a pension of a few pounds a month, but a few pounds a month is what can make the difference between relying on a food bank or going to a supermarket. You don’t need to be Goerge Orwell or Jack London to know what it’s like going to a food bank -it’s degrading.
Pensions for everyone
We want a pensions system which is more inclusive, we want to tear down the barriers to entry to auto-enrolment, taking away the LEL, reducing the earnings trigger, including the self-employed and starting people saving at 18 not 22.
But if we do that, we need to think about the benefit of auto-enrolment to those who enter the pensions poor and leave them poor. We need to think about efficient ways of converting this extra saving , from those who are saving out of subsistence wages, into extra income which rewards their saving.
That means excluding pension saving from means tested benefits (something that doesn’t happen today) and it means paying people with small pots , fair pensions. By “fair”, I mean not excluding those with limited savings from pensions (as happens with annuities and drawdown – where the costs at entry and in management are prohibitive).
It means thinking of pension payment systems that can distribute a few pounds a month (or a week) directly to a pensioner with minimum intervention. This can and is achieved all over the world through the use of digital payment systems. It means using collective means of pooling savings and managing mortality for the benefit of the pool, as can be done with CDC). It also means recognising that the kind of buffers which we have built into the system to protect those in DB schemes are a luxury that cannot be afforded. We cannot afford to invest in financial products such as gilts and cash deposits that offer a negative real return.
Above all else, we cannot exclude the poor from a pension from their savings, when we have coerced them into saving for a pension through auto-enrolment. The millions of people with pots less than £10,000 can’t just be abandoned as pension failures and left to their own devices when they get past 55. They need a pathway to a pension.
The State Pension remains the most important benefit for the low-earners. It is exactly what a pension should be and it offers people on low incomes a clear promise which improves as time goes by because we have a triple lock. We need to maintain the triple lock and use the state pension as a benchmark for how we communicate pensions to ordinary people.
I include three recent screenshots of my pension entitlement as an example
And if the financial services industry cannot come up with a cost-efficient pension scheme for the poor, we should considering opening the state pension to “transfers-in” of small pots, with a view to paying to extra pension for people’s meagre savings.