Move Your Pension

Ten ways to survive the pensions crisis

Pensions — Fri, 03 Sep 2010 23:01:57 +0000

With annuity rates halving in the past 15 years, you will need ingenuity to have enough money to retire comfortably

Millions of people's dreams of a comfortable retirement took another battering this week with the news that annuity rates have plummeted to an all-time low. New figures show the amount of money you get when you swap your pension pot for an annuity – the product that provides a regular income for the rest of your life – has almost halved over the past 15 years.

Financial information provider Moneyfacts looked at what sort of income a £10,000 pension pot can buy. In 1995, a 65-year-old man buying a standard "level" annuity would have received a typical annual payout of £1,111. Today, a man of the same age, with the same amount saved, would get just £606. As recently as 12 months ago, the same fund would have bought in £647 a year.

As the average pension pot is more like £30,000, this translates into an annual income today of around £1,800, or £150 a month. That wouldn't even cover one-third of the rent on a one-bed flat in Eastbourne. For many people, it will confirm what they already thought: annuities offer terrible value.

Is there any way of avoiding this downward spiral? Can you get out of buying an annuity? What can you do to maximise the income you get from the cash you have saved? Or is it just a case of working longer and saving more?

We set out to find ways to secure a financially brighter retirement.

• Get out of buying an annuity

It has long been the case that anyone with a personal or company "money purchase" pension had to buy an annuity with their pension pot by the age of 75. But in the June emergency budget, the government said it would be scrapping these rules completely from April next year.

This is a major change that will give many people much more choice about how they make use of their money, but there will still be restrictions, because the government is keen to avoid a situation where people blow all their pension cash and then fall back on the state. You will almost certainly have to meet a minimum income requirement in order to benefit fully from the new flexibility.

Bob Bullivant at retirement income specialist Annuity Direct says he expects people will probably need a fund of at least £100,000 before they can escape having to buy an annuity, while Laith Khalaf, at investment and pensions firm Hargreaves Lansdown, says: "We think it will be [an income of] at least £10,000 per annum."

In other words, the changes will not spell the end of the annuity. In fact, many experts reckon that, for most people, buying one will remain the best way of securing a guaranteed income for life.

• Delay buying an annuity

If you are about to retire, you may be tempted to put off buying an annuity for a few months, in the hope that rates will rise and you will get a better deal. This week, investment firm Schroders issued a survey showing that more than a third of independent financial advisers (IFAs) have seen a rise in the number of people looking to delay purchase.

However, many experts reckon people should think very carefully before doing this. The website rightannuity.co.uk gives an example of what might go wrong. You've shopped around for a good rate, and have been offered an annuity paying £600 a month. However, you decide to delay purchase for four months. "In that time the value of your pension fund hasn't changed, and annuity rates are roughly the same. However, by delaying, you've lost four months' annuity payments [totalling] £2,400, and you'll never get that back."

• Shop around

At retirement, most people simply take what is offered by their pension provider, with only about a third going for the "open market option" (OMO). Yet by shopping around for the best annuity, you can get up to 40% more for your pension pot. "It doesn't matter whether your pension pot is £5,000 or £1m – you should always exercise your right to use the OMO," says George Ladds at Fair Investment Company. He gives the example of a customer who had a fund of £5,823 to buy an annuity, and was quoted £181 a year by his pension provider. By shopping around, he got £255 a year.

It is quick and easy to obtain annuity quotes online by logging on to sites such as Hargreaves Lansdown's website (h-l.co.uk/pensions/annuities); you usually only have to complete a simple form.

• Ill health has its benefits

You could get an even higher income if you have what companies coyly describe as "impaired health" or "lifestyle issues". To put it bluntly, if you have a health problem that means you are statistically likely to die sooner than a healthy person – such as a heart condition or high blood pressure – you may well qualify for a better rate.

You may also be able to get a higher-than-normal income if you are overweight or smoke regularly (10 or more cigarettes a day for the last 10 years should do it).

Annuity providers in this market include Aviva, Prudential, Legal & General, Canada Life and MGM Advantage, while Reliance Mutual can be very competitive for smokers, says Bullivant.

• Income drawdown and other alternatives

There are some alternatives to annuities such as income drawdown, which allows older people to take a small chunk of their retirement pot each year as income and then leave the rest invested in the stock market in the hope that will give better returns. The problem is that the stock market has delivered poor returns, and the risk is that you will reach old age with an even smaller pot. Other options include "phased retirement", where, rather than converting your entire fund into an annuity in one go, you take the benefits of your pension gradually over time, either by setting up an annuity or moving more money into income drawdown.

• My property is my pension

If you are lucky enough to retire with a substantial pension pot – say £250,000 or more – then you may wish to consider investing in a rental property. You'll have to meet the government's minimum requirements on making sure you don't fall back on state support, but the surplus cash, if put into a buy-to-let, may yield an income higher than prevailing annuity rates. Crucially, the rent paid will probably rise (or fall) in line with wages and prices, so in real terms you'll be protected against inflation as you get older. And unlike an annuity, the property will go into your estate on death and could be passed to heirs.

• Save more money - particularly if you are young

The younger you are when you start a pension, the better, because it means you've got more time to make contributions, and there is more time for those invested contributions to grow. "Each pound you save at age 25 is worth so much more than a pound saved at 55, because it has that much more time to grow," says Khalaf.

His firm calculated that a man aged 59 would need to save £63 a month to build up the equivalent of one year's basic state pension – just over £5,000 at current rates – at 65. But someone aged 50 would only have to save £21 a month to hit the target, while a 30-year-old could get away with just £6 a month (these figures assume 6% growth and 2% inflation).

• Work longer

With all that's happened with pensions in the last few years, many people have resigned themselves to the fact they will probably have to carry on working for longer than they had planned. Those keen to do this need to make themselves invaluable to their employers. It is vital to keep your skills up to date and stay on top of the latest developments in technology.

• Move to Glasgow

Where you live can have a big impact on how long you will live. Average male life expectancy in some areas of Glasgow is 70, while in London's wealthiest boroughs it is more like 84.

So it is perhaps no wonder that many annuity providers now factor in where you live when working out how much annuity income you will get.

But if you are determined enough, it is possible to make this work in your favour. Those living in prosperous parts of the south who pack their bags for some parts of Scotland or northern England, are likely to enjoy a bigger retirement income. There is nothing stopping you from moving to an area just before you retire in order to get a better annuity rate. But is it worth the hassle and expense for, perhaps, a 5%-7% boost in income?

• Move overseas ... to Belize?

If you are worried about how you are going to manage financially when you retire, there is a more drastic solution: move to a country where property is cheap and the cost of living low.

The UK website Shelter Offshore (shelteroffshore.com) recently named its top destinations for retirement abroad, and they include Belize in central America. It says Belize is popular with retiring Americans, but, despite the fact it is a former British colony and English is the official language, it hasn't really proved a hit with Brits. The website says the cost of living can be "exceptionally cheap," and there is the official "Retired Persons Incentive Program", offering attractive tax breaks.

Nearer to home is Turkey, where, according to Rightmove, you can pick up one-bedroom flats in Aydin, on the south-western coast, from £17,000.

Rupert Jones

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BBC staff vote for strike over pensions

Pensions — Wed, 01 Sep 2010 15:50:38 +0000

Members of three unions at the BBC have voted by more than 90% for strike action over changes to their pensions

BBC staff in the unions Bectu, Unite and the National Union of Journalists have voted by more than 90% in favour of strike action over proposed changes to the corporations's pension scheme.

Today's overwhelming vote in favour of industrial action could threaten BBC coverage of the closing stages of the Proms and the pope's visit to the UK later this month.

However, with BBC management understood to be planning concessions on its controversial proposals to overhaul the final salary pension scheme, the unions held back from naming strike dates in order that talks can be held over the next two weeks to resolve the dispute.

Gerry Morrissey, general secretary of Bectu, said: "This is a significant mandate for strikes, which demonstrates how out of touch BBC executives are with their staff. We hope they will now come up with more realistic proposals, otherwise we will have no alternative but to call industrial action."

Jeremy Dear, general secretary of the NUJ, added: "This is an unprecedented result in favour of strike action and a clear rejection of the BBC's proposals.

"We have agreed to give the BBC two weeks to come back with an improved offer or face a concerted campaign of industrial action."

The Unite national officer, Peter Skyte, said: "Our members have decisively demonstrated their opposition to the BBC's pensions and pay proposals. The BBC needs to think again about stealing pension benefits already earned and retaining a defined benefit pension scheme in order to regain the trust and support of its workforce for the challenging times that face the organisation in the future."

BBC management has been facing the biggest staff revolt in years over the proposals to cap final salary pension benefits for existing members from April 2011 and to close the scheme to new employees.

Changes proposed in late June include breaking the link between final salary and pension benefits by capping pensionable salary growth at 1% a year, whatever pay increases an employee received. BBC management said the changes were required to try and tackle a £1.5bn-£2bn pension deficit.

Generous pension provision has long been regarded by BBC staff as compensation for salaries generally lower than those at its commercial rivals.

The BBC's director general, Mark Thompson, launched a round of consultation to hear staff grievances about the planned pension scheme changes last month and is due to make a further announcement when the process is concluded at the end of September.

In an email sent to all BBC staff today after the strike ballot result, Thompson said: "As I said in August, our room for manoeuvre is limited. We are facing a large pension deficit and must act now to reduce it. But we would like to meet your concerns as far as we can.

"During the last few weeks, we have been talking to the joint unions to discuss the areas where there may be scope for alternatives. We've looked at a number of options and are now in the process of working up the details of what we believe could be an additional workable proposal. We expect to be ready to announce full details in the middle of September and we anticipate that this will trigger an additional consultation period."

There is also a meeting between staff and BBC pension trustees on 14 September in central London. This follows a recent petition, organised by the NUJ, to force the trustees to hold a meeting.

The motion being proposed is that: "This meeting of members of the BBC pension scheme calls on the trustees to perform their duties to protect the benefits of the members. Specifically, we call on them to oppose the BBC's plan to reduce the eventual value of contributions already made to the scheme."

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Jason Deans

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Alliance Boots offloads £300m of pension liability to specialist PIC

Pensions — Tue, 31 Aug 2010 19:28:27 +0000

Former Alliance UniChem pension scheme to be dissolved, and its 3,000 members given Pension Insurance Corporation policies

Private-equity-owned healthcare and pharmacies group Alliance Boots has offloaded £300m of pension liabilities to a specialist pensions insurance group in a bid to cap its pension responsibilities.

The Pension Insurance Corporation (PIC) is taking over the management of the old Alliance UniChem scheme, which has about 3,000 members.

Alliance Boots said the deal was part of "efforts to ensure long-term security of accrued benefits for its defined benefit pension funds". Members of the scheme will be given individual insurance policies by PIC, and the Alliance Boots scheme will be dissolved.

In a statement the company hinted that it is considering similar moves for its other pension schemes. It said it is "working with the trustees … to ensure that members' pension obligations continue to be suitably funded and secured". A spokeswoman refused to provide details.

The costs of final salary schemes have risen dramatically in recent years as a result of tax changes, low interest rates, poor investment returns and increasing life expectancy. Last year Barclays told 18,000 staff it was replacing their defined benefit scheme with a cheaper defined contribution retirement plan; BP shut its £11bn scheme to new recruits in April.

Alliance Boots, which was formed by the merger of Alliance UniChem and Boots and shortly afterwards acquired by Stefano Pessina and private equity group KKR, said in January that it was shutting down its final salary scheme for 15,000 existing staff to put an end to "funding volatility". Both the Alliance UniChem scheme – the one being transferred to PIC – and the Boots scheme had been closed to new entrants for several years.

Keeping pension scheme costs under control is crucial for private-equity-backed firms, which have to service the huge debts used to buy the businesses.

Boots' move comes just after annual accounts for the private-equity-owned Acromas, the merged Saga and AA group, revealed a top-line profit of £578m. However, accounting charges and interest payments related to its net debt of £6.4bn put the business $500m into the red.

Acromas's pension deficit has risen from £50m to £194m in the past year, and is expected to rise higher when it reveals the results of a triennnial pension valuation in the coming weeks. The group is now squeezing benefits on the final salary scheme and asking staff to make higher contributions to help it cut costs.

Another loss-making private equity business with pension scheme problems is EMI, the music group behind artists such as Lily Allen and Coldplay.

EMI's management had insisted the shortfall in its scheme was just £10m but recently acknowledged that the hole was between £115m and £217m. The pensions regulator is expected to order EMI to increase its payments substantially. EMI says it can afford to pay more but Guy Hands, the financier who acquired it at the height of the credit boom, is asking investors to put up more cash to prevent it breaching its banking covenants.

Pensions expert John Ralfe has warned the higher payments could "break" EMI.

Julia Finch

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The government’s pension tax reforms are a welcome relief

Pensions — Tue, 31 Aug 2010 10:35:57 +0000

Plans to reverse Labour's decision to restrict higher earners' pension tax relief should be welcomed, says Tom McPhail

The government is finalising plans to reform the tax rules around pensions, presenting an opportunity to simplify retirement planning for millions of investors. It has proposed that the annual allowance of how much can be saved into a pension should be substantially reduced – from £255,000 a year to about £40,000.

In a direct reversal of the previous government's plans to restrict higher earners' tax relief on pension contributions to 20% they have also proposed that higher rate taxpayers should be entitled to relief of at least 40%, even if they earn in excess of the £150,000 threshold for the 50% tax rate. One point on which they are consulting is whether the tax relief should be extended to the full rate of 50%.

This is as much a political issue as a fiscal one. Labour introduced the tax relief restriction in a burst of dogmatic pique once they realised that under the original tax relief rules they would automatically be giving 50% tax relief to those higher earners who paid pension contributions.

The top 1% of the workforce by earnings – around 300,000 people, which roughly equates to those who are liable for the 50% income tax – pay around 12.5% of the government's total income tax receipts and around 24% of the government's total tax take. Pension tax relief is granted in recognition of the investor's decision to defer consumption until retirement; to save instead of spend. It is logical to grant tax relief at the same rate as tax is paid.

This means that the pension contribution is effectively made out of untaxed income. When the investor reaches retirement they then pay income tax on their retirement income. The problem with Labour's plans, and the reason why it is so important that they are unwound, is that they make the whole system massively complicated, and therefore more expensive.

If income tax rates and pension tax relief rates are misaligned then you need a vast bureaucracy to keep the system in check. Without this, employees can circumvent the rules by arranging to give up part of their salary in exchange for an employer contribution into their pension. What is more, the simple message about tax relief on pensions – that you get tax relief on your contributions at whatever rate of income tax you pay – has to be qualified with caveats and explanations. This means that every leaflet, pension scheme booklet, brochure, advertisement and guide to pensions has to be made longer and more complicated. All of this acts as a deterrent to saving.

To its credit, the new government seems to be making a real effort to address the savings crisis. A whole raft of proposals and consultations has been published in the past three months with the intention of promoting a savings culture and giving individuals the means to take responsibility for their own retirement provision.

The proposals around the annual allowance are a sensible way of reversing the more damaging aspects of the last government's plans. The Treasury should restore full tax relief on pension contributions, even for 50% taxpayers, and in so doing make an important step towards a simpler and more sustainable pension system. It will also be a fairer pension system, meaning that investors' income tax on their pension contributions is deferred until they draw their pension at retirement.

In answer to critics who might suggest that such a move panders to the wealthy, it is relevant to note that it was Labour who introduced the ridiculously high £255,000 annual pension contribution allowance. In cutting it to around £40,000 the government will be introducing a significant restriction on the scope for higher earners to claim tax relief on their pension contributions. They will also be making pensions simpler, and in this we should support them.

Tom McPhail is head of pensions research at Hargreaves Lansdown

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Third of FTSE firms plagued by pension fund deficits

Pensions — Tue, 31 Aug 2010 06:00:22 +0000

• 32% of FTSE firms struggle to plug gaps in their pension funds
• BA and BT have won extra time to repair pension fund deficits

Almost one-in-three blue chip pension schemes are so under-funded that they cannot be restored to health without companies either slashing dividends and capital spending or securing radical concessions from trustees and regulators, according to a study by KPMG.

The findings provide a stark illustration of the increasing strained symbiosis between investors and firms with final salary pension schemes, as their profits dry up and, in some cases, solvency concerns hove into view.

Shrinking cashflows and ballooning pension scheme shortfalls across FTSE 100 companies at the end of 2009 meant that, after dividend payouts and capital expenditure, 32% of firms "can now not payoff deficits in any realistic time frame from discretionary cash flow," KPMG concluded. This compares with 22% of FTSE 100 firms a year ago.

The published study does not name those firms with the least affordable pension deficits as many FTSE 100 firms are audit clients of KPMG. However, blue chip companies with large deficits such as BT and British Airways are thought to be high on KPMG's list, as are utility groups with high capital expenditure commitments such as National Grid.

Banks such as HSBC, Lloyds Banking Group and RBS – which have large schemes and last year saw depressed profits – also feature, though profits have recovered a good deal in recent months. By contrast the impact of plunging profits at BP, which also has a large scheme, is not thought to be captured by the research.

Mike Smedley, KPMG pensions partner, claimed the findings highlighted a need for pragmatism from pension trustees. "The most important thing in securing the future of pension provision is to secure the future of the business, not the other way round," he said. "If a business says to its shareholders we're not going to pay any dividends until we've met our pensions deficit, their share price probably collapses, the banks won't lend to them, they can't invest in the business and then they might struggle to make the profit to fund the pension scheme – potentially."

His perspective is not shared by all pensions experts. John Ralfe, an independent consultant, said: "I don't think the conclusion should just be that trustees should go softer on companies. In fact I think companies and shareholders need to recognise that dividends are also under pressure."

Ralfe added that however bad the funding crisis was among Britain's top blue chip employers, it was almost certainly worse lower down the market among smaller firms.

So far pension regulators have shown themselves extremely accommodating to large businesses seeking extra time, beyond the usual 10-year limit, in which to repair their pension deficits. Both BA and BT have secured such deals, with the latter still able to maintain an attractive dividend for investors.

An intervention by the Pensions Regulator in the case of loss-making music group EMI this autumn will be closely watched by many firms looking to discover at what point the watchdog is prepared to show its teeth. Regulators must determine the amount of cash the troubled group must pay into its pension scheme each year to repair a deficit previously estimated at up to £217m. EMI has £3bn in borrowings after being acquired in a heavily debt-financed deal by private equity house Terra Firma three years ago. Since then rows with pension trustees have meant no repairs to the deficit have been made.

The ruling on EMI is expected to provide an important moral hazard benchmark from which other strained pension negotiations will take their lead.

Simon Bowers

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Regulator to determine the size of the EMI’s pension scheme deficit

Pensions — Sun, 29 Aug 2010 15:54:40 +0000

• EMI's pension fund deficit could top £200m
• EMI's future may rest on financial support from investors

EMI will be ordered by the Pensions Regulator to plug a gap in its pension scheme that could top £200m after the company and pension trustees failed to agree on the size of the deficit.

The regulator's determination panel will decide on the extent of the shortfall in October after months of wrangling, which included an attempt by the regulator to arbitrate between the two sides.

EMI, whose artists include Lily Allen, Coldplay, Robbie Williams, and Iron Maiden, initially claimed the deficit was only £10m, but recently its parent company, Maltby Capital stated the deficit stood at between £115m and £217m.

In the next couple of months, the regulator will determine the precise size of the black hole and order EMI to make annual top-up payments over the next 10 to 15 years.

Insiders at the debt-laden company that was acquired by City financier Guy Hands for £4bn at the height of the credit boom disputed claims by pensions expert John Ralfe that the deficit could "break" the company.

Ralfe told the BBC that bridging the deficit "could conceivably push the company into administration."

But sources said EMI could easily make extra payments to redress the pension scheme shortfall as it was making several hundred million pounds in profit, even after interest payments.

Nevertheless, EMI made a net loss of more than £600m last year after write downs in the value of the business that was bought by Hands' buy-out firm Terra Firma.

The company, which owes Citigroup £3bn, is taking the US bank to court in the US, claiming that it persuaded Hands to pay over the odds for EMI by implying another bidder was in the frame – when this wasn't the case.

Citigroup vigorously denies the accusation; the bank and Terra Firma have scheduled arbitration proceedings in front of a US judge next month, in a bid to avoid a formal legal hearing.

Maltby has indicated that EMI may need millions more in support from investors in Terra Firma funds to help it avoid breaching banking covenants.

The covenants "tighten steadily over the coming years," said Maltby. In a statement within Maltby's accounts, KPMG said: "Notwithstanding the conditional commitment received from the company's shareholders to provide certain 'equity cure' funding relating to the covenant test periods to 31 December 2010, there is no certainty that such funding will be sufficient to effect all the cures required in relation to those test periods."

KPMG adds: "Furthermore, current indications are that further funds will be required from shareholders for cure payments in respect of the test periods ending in 2011. No agreement has yet been reached with the company's shareholders for such further equity injections, nor is there any certainty that such an agreement will eventually be reached."

The accountant's warning is not the same as a formal qualification of EMI's accounts, but it indicates reservations about the ability of the company to continue as a going concern.

Richard Wachman

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Liability insurance is not the solution to pensions deficit problems

Pensions — Fri, 27 Aug 2010 13:48:56 +0000

The financial services sector has been fleecing retirement funds for years but should not be allowed to use this product to continue the practice nor employers to cover up lack of cash

Pension funds have found a new way to fritter away the cash saved by workers. It is called liability insurance.

Every pension conference is dominated by the subject. Employers with final salary-scheme guarantees, and large deficits to match, will grab at almost any product that promises to make the problem disappear.

It involves buying derivatives, swaps and hedging investments at vast expense to offset any shocks from poor investment returns or future increases in life expectancy, inflation and interest rates. All the big investment banks and their advisers are queuing up to persuade pension funds to buy these insurance products. Conference delegates, under orders from their finance directors, listen intently during sessions on "how to de-risk your fund". Outsourcing all or part of the fund to an insurance company, often at vast expense, is another option.

Earlier this week the government's lifeboat fund, which rescues bust company schemes, said it preferred a slightly different strategy. The Pension Protection Fund, which is expected to double the amount of assets it manages to £10bn, once the current crop of bust companies are admitted to its scheme, will keep a buffer fund, or separate savings pot, to cover risk, rather than pay for expensive insurance – like someone who buys new kitchen appliances and refuses to pay for extended warranties. That's not across the board. It will hedge some risks, but refuses to go down the route of calculating all risks and insuring against them.

The financial services industry has fleeced retirement funds of their cash for years with exorbitant broking and transaction fees and extortionate management charges. It cannot be allowed to repeat the trick with insurance.

Phillip Inman

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Greek government to kill off payouts to dead claimants

Pensions — Thu, 26 Aug 2010 19:27:44 +0000

During a drive to end state extravagance, it has been discovered that millions of euros have been paid to deceased pensioners

Greece's fabled culture of honouring the dead has reached new heights with the discovery that the debt-choked country paid hundreds of deceased pensioners retirement payments for decades.

Under unprecedented pressure to cut spending and replenish empty state coffers, the socialist government announced it would be putting a stop to the seemingly impossible: dead centenarians receiving handouts.

"We are obliged to announce that some people in this country have been drawing pensions, though they may have died years ago," said Deputy Labour Minister George Koutroumanis.

Hundreds of millions of euros are thought to have been unwittingly wasted in payments that were dutifully deposited into bank accounts every month. Of the 500 recipients, aged over 110, more than 300 had died in the past seven years.

"One pension, for example, was paid to someone who had died in 1999," said Koutroumanis.

The crackdown, part of a historic drive to end state extravagance, will probably save the public sector up to ¤100m (£82m) a year. Although most of the handouts had lain idle in banks, some had continued to be claimed by fraudulent relatives.

After narrowly averting bankrupcty earlier this year, Greece has promised fellow eurozone nations and the IMF – the providers of up to ¤110bn in emergency loans – it will clean up its act.

Furious efforts are now underway to compile a pensioner registry.

Prime Minister George Papandreou's government, which recently completed the first ever census of civil servants, admits it has no idea of the real number of public employees.

The discovery of dead Greeks claiming pensions emerged as the ruling socialists attempted to clamp down on profligate practices, starting with chaotic account keeping.

In addition to bogus pensions, billions of euros are believed to have been lost within a leaky state system riddled with scams such as fake jobs, forged health prescriptions and fraudulent government spending in the form of supplies to hospitals and state organisations.

Helena Smith

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How to double your pension payout | Steven Hill

Pensions — Wed, 25 Aug 2010 18:00:39 +0000

Social security, celebrating its 75th anniversary, is a popular scheme – but payments are meagre. Here's the solution

In the aftermath of the great recession, a debate over the American national pension system, known as social security, is heating up. This debate raises fundamental questions about what kind of society America wishes to be. The debate so far has been between those deficit busters who say social security must be trimmed back to reduce government indebtedness, and others who want to maintain it as is.

But the New America Foundation just released a study (which I authored) that proposes a different approach: doubling the current social security payout, and making it a true national retirement system. Creating a more robust system of "social security plus" would be good not onlyfor America's retirees, but also for the macro-economy at large.

Here's the dilemma the US faces. Since the second world war, retirement has been conceived as a "three-legged stool", with the three legs being social security, pensions and personal savings focused on home ownership. Today, though, most private sector employers have quit providing pensions, and state and local government public pensions are drastically underfunded.

In addition, a collapsed housing and stockmarket, combined with inequality that was growing even before the recession, have drastically reduced Americans' personal savings. In short, the "retirement stool" is no longer stable and secure – and suddenly, social security, which always has been viewed as a supplement to private savings, is the only leg left for millions of Americans.

Studies show that people in the bottom two income quartiles depend on social security for 84% of their retirement income, and even the second richest quartile depends on social security for 55% of its retirement income. Only the richest 25% of Americans don't rely heavily on social security.

But the real problem with social security is not, as its critics say, that it is underfunded. As Dean Baker points out in a column for the Huffington Post, contrary to gloomy predictions, the programme is on solid financial footing, with the congressional budget office projecting that social security can pay all scheduled benefits out of its own tax revenue stream through at least 2037.

The bigger problem is that social security's payout is so meagre, and this is problematic since it has been thrust into this new role as a de facto national retirement plan. Currently, the level of payout replaces only about 33-40% of a worker's average wage from the year prior to retirement (compared to Germany where it replaces 70%). That is simply not enough money to live on when it is your primary – perhaps your only – source of retirement income.

Doubling social security's individual payout would cost about $650bn annually for the 51 million Americans who receive benefits. Here are some ways to pay for it.

First, lift social security's payroll cap that favours the wealthy. Presently, social security only taxes wages up to $106,800 a year, and any income earned above that is not taxed. The net result is that poor, middle-class, and even moderately upper middle-class, Americans are taxed 12.4% (split between employee and employer) on 100% of their income, but the wealthy pay a much lower percentage. Millionaire bankers effectively pay a paltry 1.2%.

Making all income levels pay the same percentage – that's how Medicare works – is popular with Americans and would raise about $377bn.

Second, with all Americans receiving social security plus, employer-based pensions would be redundant, so businesses would no longer need to receive the substantial federal deductions they currently accrue for providing employees' retirement plans. These deductions total a whopping $126bn annually.

Those two alone would provide three-fourths of the revenue needed to double social security's payout. Other possible revenue streams exist, such as reducing or eliminating other unfair deductions in the tax code that benefit higher income people. We could also implement this in stages, targeting first those who are most in need, or devoting an estate tax to it or cutting the bloated defence budget. We also could allow active seniors who have not yet reached full retirement age to take a half pension and work half-time without losing their right to a full pension upon retirement.

An expansion of social security – one of the most successful and popular social programmes in American history, currently celebrating its 75th year – would be good for the macro-economy as well, because it would keep money in retirees' pockets and stimulate consumer demand. It would act as an "automatic stabiliser" during economic downturns, and make benefits portable when changing from one job to another. It also would help American businesses trying to compete with foreign companies that don't provide pensions to their employees, since those countries already have generous national retirement plans. And it would be broadly fair, since even those higher-income Americans who are losing their tax deductions would see part of it returned to them in the form of a greater social security payout.

In short, social security plus would provide a stable, secure retirement for every American and contribute greatly toward a solid foundation from which to build a strong and vibrant 21st-century US economy.

Steven Hill

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Perspectives on retirement | The people’s panel

Pensions — Fri, 20 Aug 2010 13:30:46 +0000

Four Cif commenters, four perspectives, one issue: readers share their experiences and recommendations on retirement

In the midst of squeezed public spending and budget cuts, the coalition government has announced plans for a radical retirement shakeup that would include scrapping the default retirement age. Today, a report by the Pensions Policy Institute predicts that the pension age would have to reach 72 to keep costs at previous levels - but also warned that "poor people do not live as long as the rich, suggesting that they should therefore receive more in their state pensions". In light of this debate, we have asked Comment is free readers for their take on retirement from a personal perspective as part of our People's panel series (you can read our previous readers' panels here).

Because of the personal nature of the debate, moderation will be strict.

Judy Staton

I retired about three months ago at just over 60, having spent the last nine years of my working life as a self-employed researcher and consultant in the field of post-16 education and training. Initially I felt totally bereft, just as I had at the start of my first spell of maternity leave 30 years ago! The problem wasn't a lack of things to do, rather that I felt that in giving up work I'd lost a key element of my identity and an essential component of my self-esteem. It has taken me these three months to accept that my most recent stint of self-employment (home-based, mostly phone contact and interviews followed by report-writing, nearly always acting as "second fiddle" to colleagues) had, in fact, done little to nurture my sense of self-worth.

I now genuinely believe that life "post-work" offers many more opportunities – both to develop myself and to make a difference to the lives of others. I've signed up to offer my services as a charity trustee, am taking an active role within my local U3A branch and am determined to achieve fluency in Spanish after years of dabbling. Perhaps most important of all, I've started writing humorous and factual pieces for online sites. I am not sure I will earn much if any money, or get many readers, but I'm really enjoying the experience!

My recommendation: I support this government's move to abolish the mandatory age for retirement of 65 but think it needs to be coupled with measures to encourage employers to facilitate "winding down" through part-time working. It's fairly clear that most people will need to work on beyond this age for financial reasons, and having this option will be very important. In this respect, people like me, who can choose to retire at 60 let alone 65, have been extremely lucky.

Paul Nethercott aka ManchePaul

The baby-boomer generation now reaching retirement is probably the first generation where both partners have worked for most of their lives, and certainly the first where many women have: 70% of women aged 50 to 59 are working. Because – so far – retirement ages for women are lower than for men (60 and 65 respectively) in the UK, and women are on average two years younger than their male partners, most couples are finding that one wants (or is able) to retire some years before the other.

Retirement creates enough changes for couples. If one stops work and has to wait for the other to retire, any anticipated major changes such as relocation, downsizing, travel and adventure, or even extending general shared hobbies, are put on hold. The one not working may find this difficult, especially as each passing year increases the chance of ill health, which may prevent their plans altogether.

I retired two years before my partner, but we were able to make enough adjustments. But we have friends where the age difference means that there are 10 or more years difference. In one case, the man is nearing 75 and has less energy than he used to, but his wife is not yet 60 and is still brimming with the stuff.

Apart from the delays in beginning a proper retirement life together, the fact of one partner having lots of things to talk about at the end of each day, and the other much less, is a potentially dreadful issue, involving loss of self-esteem and a feeling of being found dull for the retired one – not to mention the possibility of mutual resentment. This has to be actively worked at to avoid.

My recommendation: There is very little information available about the differential in retirement dates. Commercial organisations only talk about financial planning and pension investments. The government website Directgov doesn't mention it, although there is a lot of other useful information on non-financial issues of retirement. It seems to me that there is a clear need for people to think about this well before the first retirement is on the horizon, and for official sources of information and advice to reflect the potential problems.

Madeley

I'm 48 and had never really taken saving for my retirement seriously. I am a "spending my money now" sort of person, as you can't take it with you, but I also have a cautious side. But fatherhood has changed my outlook on life. I now want to make sure I have something to leave my children so they don't have to struggle to go to university or buy a house.

What worries me, though, is the mixed message we are getting from pension experts and ministers. They encourage us to save for our retirement, but if at the end of it there's another downturn, they might just shrug their shoulders and say: "We don't know where your money's gone, and you can't have it back even if we could find it." I understand there are no guarantees in life (except death and taxes!), but would appreciate a bit more backup from both private companies and the government.

My recommendation: More assurances to help us save for our pensions would help. Perhaps a scheme linked to your last salary, or telling companies they have to use their profit, when they make any, to pump cash back into people's pensions following a financial crash would be helpful. We already pay compulsory taxes and NI – perhaps we could divert 5% of our salaries, when we reach a certain level, into a savings plan, backed by the government who would guarantee our money back if the markets crashed.

Martin Allinson aka GreatGrandDad

My feelings about retirement, as about work, are rooted in what I feel is my identity. I fancied being an explorer and was lucky to be able to explore many lifestyles in various parts of Canada and Britain while earning my living as an electronics engineer in industry and academia. A small early-retirement package in 1985, at 50, let me take teaching contracts in Brunei and in Singapore later on.

A year of unemployment in Yorkshire in 1993/94 was pure hell. Following up newspaper ads is not the way to go about it, but I didn't know to "get out and about" doing odd bits of agency work, or volunteering. Hearing about a job that wasn't going to be advertised, I got it. But I packed it in when my wife was diagnosed with terminal cancer.

In bereavement, I started proper retirement. Having a "second youth", doing some of the things that hadn't come my way in my first one, and redoing some of the things that I had found enjoyable as a youngster. That has included a foray into politics as a parliamentary candidate (but not in any danger of being elected!), a return to trekking in the Himalayas and to the far east, and remarriage that has brought me to living in a rice-growing village in rural south-east Asia.

Needing to supplement my pension in order to get set up here, I used to fly over to Yorkshire for short periods and do whatever came my way. Mostly it was supply teaching in the rougher, tougher comprehensives (but you can stand a lot when you already have your flight booked back to civilisation – and anyway, what doesn't actually kill you strengthens you).

Since I turned 70, though, I have been taking things easy – just pottering down to the local university and cogitating about "well-being" with the folk in social sciences (and frequenting CiF, of course).

My recommendation: In my opinion, policy should be aimed primarily at encouraging those who have experience, understanding and knowledge to pass it on to the younger generations; "use it or lose it" cuts both ways.

My generation has been too indulgent of their children's and grandchildren's generations. For instance, we were brought up to save up 25% of the purchase price of our first house and could only get a mortgage of 250% of the husband's salary (with the wife's salary not being allowed to be considered). I once moaned to my father that this was too tough, but he told me sternly: "Those rules protect my generation's savings against your generation's overconfidence – and, incidentally, protect your generation against mine's greed to get unearned income." If only my generation had passed the message on.

The very word "retirement" is as out of date as the phrase "job for life". Drop it. We are now entering the post-industrial era. Substitute "the gardening years" and start morphing those golf clubs into gardening associations. You'll be glad you did when facing the price of food within a very few years …

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