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The Long Term Effects of Insufficient Pensions

Public sector workers may be striking over pensions. But it's insufficient private sector pensions that will do lasting damage to the economy...

LATER THIS YEAR, on 30 November, public sector workers in Britain plan to strike to defend their pensions, writes Jason Riddle of Save Our Savers.

Changing public sector pension schemes so that they are indexed to CPI and not the higher rate of RPI is estimated to be equivalent to a 15% reduction in the value of a pension. On top of this millions of public sector workers are being asked to pay more towards their reduced pensions.

The private sector also has an issue with pensions. For the majority, current pension arrangements are simply not fit for purpose. The question of CPI versus RPI does not enter into it. Annuity rates have fallen by 45% over the past 16 years so all a typical pensioner can afford is a fixed income for their retirement, guaranteeing that their living standards will fall as they get older. For those currently on a fixed income the impact of inflation over the last two years has been to reduce their spending power by about 10%.

Opposition Labour Party leader Ed Miliband is telling the public sector unions not to strike, but at least they have a weapon to wield. Workers in the private sector feel so helpless that many have simply walked away; currently only one in three contributes to a pension.

The government acknowledges the future impact of people having inadequate pensions. The growing number of old people will become increasingly dependent on a proportionally smaller number of younger workers, causing the tax burden to rise and living standards to fall.

The current level of saving is insufficient. For the private sector to match public sector pensions requires contributions of over 20% of salary. In 2009 the Office of National Statistics found that the average contribution into a defined contribution (DC) scheme was 9.3%. The introduction of auto-enrolment means that more people will start saving but the signs are that the average amount saved per person will reduce and that the resulting pensions will be inadequate, exactly the reason people walked away from pension saving in the first place.

The underlying problem is that the private saver in a defined contribution schemes is forced to bear all the risks of increasing longevity, inflation and economic turmoil. Unlike those in the public sector who have these risks underwritten by future employees and the taxpayer. For the individual saver a pension is not a savings plan – it is a gamble. The latest pension changes have done nothing to resolve this but have just re-enforced the two-tier pension system.

The government's current focus is public sector cuts and unemployment it is pinning its hope on economic growth in the private sector. There are those who think that public sector spending should prop up the economy, but more debt is surely not the solution. Given the current situation in Europe, to see the Government as a bottomless money pit is the worst form of head-in-the-sand ostrich economics.

The private sector might be driven by spending, but it is built on savings. Savings provide the investment that businesses need to start and grow. They also enable us to buy big ticket items such as cars and holidays. When our wage-earning days come to an end, they enable us to keep spending.

For the government to get behind and support savers now is the path back to a long-term robust economy. The private saver may not have the fearful bite of the public sector unions but the consequences of disregarding their needs will have a far more lasting and damaging effect on the economy.

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Founded in 2010 as a reaction to the Bank of England's record low interest rates, Save Our Savers campaigns to get a better deal for British savers. Its stated aim is to support and encourage a savings culture in the United Kingdom as the best way to achieve long-term economic prosperity, arguing that "a country without savings is a country without a future".

See the full archive of Save Our Savers articles.

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