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The Third Rock Forum - Economics

Article Title
Pensions: Problems and Solutions
Paul G
Topic Section(s)
Submitted : 14-09-2010 15:56
Amended : 25-09-2019 17:58
Status : Approved:  
Likes : 0
Dislikes : 0

There is much talk at present about the pensions problem.

The old age pension at its current level does not provide sufficient money for any pensioner to live comfortably without additional funds, either from the state, in the form of supplementary benefits or from private provision in the form of a private pension fund or savings and other investments.

As the population grows and people live longer, the present unsustainable situation will quickly reach crisis point.   As a result, many politicians are advocating postponement of the retirement age for men (and probably women) to 67 or 70.   This proposal has the attraction for politicians that it does not require anyone to pay more now, and it can perhaps be justified to some extent by the argument that when the Old Age Pension was introduced for men at the age of 65, they were not expected to live for more than a handful of years.

That said, it is a poor prospect for youngsters today that they may have to work until they are 70, especially when they realise that they are not contributing to a real pension fund for themselves but simply being taxed to pay for the pensions of their elders who have enjoyed the benefits of relatively early retirement.

Of course, the state pension system should have been properly funded from the start or, if that was at the time economically impossible, from the moment the country could afford it.  (If any private pension fund had run their business the way successive government have maintained the state pension scheme, they would have been imprisoned.)  We do not, however, have the ability to change the past, so starting from where we are now, we wish to propose an innovative solution to the pension problem.

 We should say, first of all, that we take the following premises:


  • that any pension scheme should go with, rather than against, the grain of human nature

  • that the majority of the working population are more than happy to do their best for their family, especially their children

  •  that it is generally better for people to provide for themselves if they can, rather than to depend on the state


On these premises, we base the following proposal:

  1. Every individual should be offered the opportunity to set up a pension trust owned and managed by the individual - a personal pension trust fund (PPTF)
  2. The government should provide realistic advice on how much each person needs to invest to generate various levels of income at pension age and should offer, as one option, a government bond with guaranteed rates of return for those who do not wish to manage the investment of the fund  themselves.
  3. The money paid into the PPTF should be tax paid - but the growth of the money in the fund and any withdrawal of the money in the form of pension at 'retirement age' should be tax free
  4. At a 'retirement age' determined by the government, the individual should be entitled to withdraw money from the PPTF, either in the form of interest on the capital (if the fund is large enough) or in order to to purchase an annuity
  5. Although at 'retirement age' the individual would be entitled to withdraw money, there would be no obligation to withdraw money.  Any money remaining in the PPTF could be be bequeathed by the PPTF owner to any other individual (generally, but not necessarily, a partner or children) as a PPTF, tax free, subject to the same rules as applied when the trust fund was formed.
  6. An individual who inherited such a Personal Pension Trust Fund would be permitted to add to the fund with 'tax paid' contributions throughout their lives or, if they already have such a pension trust fund, to merge it with their own.

The purpose of the scheme is

  • to encourage as many people as possible to provide for their own retirement
  • to enable those who can afford it to build-up a trust fund for future generations

Currently, elderly retired pensioners who are well off have every reason to spend their surplus money on themselves because of death duties.  It would be better for the country if they provided that surplus wealth as the basis for a PPTF for their children, thus relieving the burden on the state.

Even those with modest incomes would be motivated to set up a PPTF as it would give them the chance to provide not only for themselves but also potentially for their children.

All contributions to the PPTF are tax paid, so the government does not lose revenue as it does with present pension contributions, but once the money is locked into the PPTF, it grows tax free and can be withdrawn, subject to the rules for withdrawal, tax free.  The government would probably receive massive investment via the proposed government bond (see point 2 above).

Since each PPTF is owned by an individual, it is a personal asset.  As such, in the event of divorces and remarriage, there would be a need to divide up the PPTF into smaller PPTFs.  These smaller PPTFs would either provide the start for pension provision for the recipient or, if they already have a PPTF, would constitute an additional contribution.

Why is this idea worth considering?

The present practice of funding current pensions out of current taxes is unsustainable.  In the end, taxpayers will rebel against a system that is heading for bankruptcy.   This proposal motivates the individual to provide for themselves and their family.  It taps in to a primal human instinct.  It will encourage prudence and altruism; whereas the present system encourages irresponsibility and selfishness.

What will be the long-term effects?  The aim would be to reduce very substantially the number of people who have to rely on the state pension.  The state pension would become the last resort of those who simply hadn't been able or hadn't wished to provide for themselves.  Families which had built up a decent PPTF could take pride in what they had achieved for themselves, their children and their children's children.  Hopefully, people would brag about the size of their PPTF instead of the value of their house.   Knowing they could provide the basis for a decent pension for their children would be a powerful motivator for the elderly better-off to place suplus money in their PPTF, rather than to spend it on themselves.

What would it cost the state?  It would actually save the state money in the short term because the money paid into the PPTF would be tax paid, whereas current contributions to conventional pension funds are tax free.   In the longer term, the state would lose the tax on the pension money when the pension is taken (because the money would be taken tax free)  but, in return, it would have a much smaller pension burden to carry.

The individual would know the value of his/her PPTF and what benefits would be available; the state would know that the PPTF was funded with real (tax paid) money. 








Status: Approved
Reply Date : 31-12-2010 10:31
Author : Frances
Eye of the Tiger – a reply to Pensions Problems and Solutions
It is true that our present state pension system will not be able to cope with the increasing number of retired citizens and PPTFs make fine case for inherited wealth without taxes. Why did we put an end to that system?

Here are just a few points that should be considered for such a scheme, with lessons from the old world and the new:

History is littered with respectable families brought to genteel poverty thanks to a profligate son taking control of the family fortune as soon as he reached his majority. What safeguards in could be place to stop swinging elderlies from having a wild time at the gaming tables and leaving their sucessors in pension penury? Are those powerful feelings of parenthood enough, or would an age of majority of 68-70 mean that people had matured sufficiently to recognise the benefits of good stewardship?

What would happen if increasing amounts of money were effectively taken out of the national economy and sequestered in what - a bank? Perhaps with a global economy it would not matter any more, but since the 1980s have we not done our best to release people's savings into financial productdom to keep money in circulation and enable value added profits?

Maybe you would have financial institutions manage PPTFs according to English law, but how would you stop them raiding the family nestegg as they have with existing private pensions or denying you the yield you deserve in favour of their shareholder value?

Indeed, how would you stop future government administrations changing the rules if there was a pool of personal savings just sitting there as tempting as a scapegoat in the eye of the tiger?

It seems there is only one solution - a new kind of pension mutual society, answerable to its members and protected from financial raiders like a fortress. Anyone up for that?
Status: Approved
Reply Date : 02-01-2011 17:24
Author : Annie
Pensions and the real world
The purpose of proposing PPTFs was to resolve the problem facing politicians in dealing with pension provision. The merit of the suggestion is that;
• It works with rather than against human nature
• It relieves the state of the extremely onerous and, in future, almost certainly impossible task of providing adequate pensions for all UK citizens
The idea of simply setting up a pension mutual fund fails to meet either of these requirements unless such a fund had most of the characteristics of the proposed PPTF.
To provide a pension fund that will provide people with a good state pension in retirement they would need to set aside at least 30% of their income throughout their working lives. People will not invest that level of their income into a state pension scheme where:
a) there is no secure pension fund (indeed, no actual fund at all)
b) the benefits are not related to the contributions
Governments have never had the courage to tell the people the level of contributions they would need to set aside. Instead they have paid the old age pension and supplementary pension benefits out of current taxation. This approach was always dishonest, should have been illegal and, more importantly, is now unsustainable.
The idea behind PPTFs is very simple. It assumes that, while people won’t pay 30% of their income into a non-existent pension fund with no relationship between what they pay and what they will eventually receive in pension, they will consider doing so if it is a genuine pension fund over which they personally have control and which they can pass on to their children. Those who can afford will respond much more positively to the proposed PPTF scheme because it works with rather than against human nature.
At the same time, it also benefits:
• the state (because the money put into the PPTF is tax paid, not as with today’s pension funds, tax free, and much of it would be placed in government bonds by individuals who did not wish to manage investment decisions for their own trust fund)
• those who cannot afford to make provision for their own retirement (because, as more and more people, generation by generation, built up their PPTF, there would be less call on the state to provide state pensions and therefore more money for those who still needed the state pension)
As for the suggestion that the affluent elderly would squander their PPTF on frivolous cruises and or/fast cars, ironically it is precisely the system we run at the moment which encourages such self-indulgent extravagance because pensions must be converted into annuities (which means, on death, only the financial sector benefits) and any other wealth above the fairly modest exemption limit is subject to heavy Inheritance Tax.
Instead of griping about the wealthy, why not exploit them and their natural instinct to build a better future for their children? And why not use all means to encourage everyone in the country to put effort into being independent of the state, not dependent on it. We would have a happier, healthier, wealthier country if people were motivated to work harder, better themselves and provide for the future. The state’s role should be to ensure everyone has a fair chance of achieving such goals. It could start by making sure every school leaver can read and write, has a basic grasp of mathematics and can engage in constructive debate. That done, most people could stand on their own feet, and many would be able to achieve the upward social mobility that recent governments have somehow managed to impede.

Status: Approved
Reply Date : 02-01-2011 21:09
Author : georgebundle
Eye of the Tiger – a reply to Pensions Problems and Solutions
I think the proposal of the PPTF as described by Paul G is effective in solving the problem, cost effective for all concerned, including the government and eminently workable on the lines proposed. At some point the proposal should reach the desk of the Permanent Secretary of the Work and Pensions Department. (Not the Secretary of State as, for him/her, the issue would be intertwined with political and career considerations not touching the Permanent Secretary.)

Meanwhile, there is an example available from the USA about changing the pensions system enjoyed by the previous 3-4 generations to one which the baby boomers’ generation are forced to adopt. Most pension schemes in force until recently were based on a Defined Benefit concept. One could create a personal pension scheme or contribute to a company scheme knowing that at the ‘retirement age’ he/she will get a defined benefit until death.

In the 1970, when the American Administration first noted the potential danger in demographic and economic developments impacting on the pensions system, they introduced a new scheme, ERISA, or Employee Retirement Income Security Act. This act changed the concept of pension funds from Defined Benefits to Defined Contributions. In essence, it was left to each individual worker how much he/she contributes each month to their own funds, besides any employer contribution. These contributions are not subject to tax. It also meant that such funds would have to be invested in bonds, shares or other realisable assets. The law also stipulated that at retirement the person will have to raise enough cash each month from the sale of assets to cover their monthly requirements. This cash in process is, of course, taxable.

It was not until the ENRON and the Arthur Anderson scandal that people woke up to the fact that if your contributions to your pension fund was invested, for example, in ENRON shares, the pension fund would vanish with the company. Lessons were quickly learned, alas too late. The interesting outcome of this well-meaning ERISA legislation is that most of the 87 million baby boomers retire between 2014 and 2016 and they will start selling shares every month by legal requirement. What will happen to the stock market in the US when 87 million people will take out $2-3,000 at the start of each month?

Fortunately, Paul G’s proposal of PPTF avoids the above unintended consequences and should be taken very seriously.