Research by Aviva shows that the pensions gap in Europe is approximately €1.9 trillion, equivalent to 19% of the European Union’s GDP. This yawning gulf between individual’s pensions and the level of income they need to guarantee an adequate standard of living in retirement means that hundreds of thousands of people in Britain and across Europe face grinding poverty in old age.
Alarm has been raised about the provisions made by women in particular, after the insurance giant Prudential published figures revealing that over two-thirds of those aged 55 or over believed they had not saved enough for their retirement.
For the under-30’s, it is easy to think that the troubles of retiring baby-boomers are nothing to do with their generation. However, the size of the pensions gap demonstrates that current saving mechanisms are fundamentally flawed, and that change needs to be made now to prevent today’s young graduate from becoming tomorrow’s penniless pauper.
Auto-enrolment is one such change. From October 1st, firms will be legally required to enrol employees in work-based pension plans, with employer contributions. The requirement, outlined in the 2008 Pensions Act, effectively compels individuals to put aside a percentage of their earnings each year to their retirement pot. Being automatically placed on a pension scheme will benefit young people most of all, as they are the one group currently least likely to save for retirement. As Sarah Hutchinson, a Young Fabians member, wrote in the last issue of Anticipations:
“With today’s 20 somethings facing record youth unemployment, flat incomes, soaring living costs, and increasing student loan repayments, it’s likely savings rates will continue to fall. Unless we can reverse this trend, a comfortable retirement will be yet another thing that our parents got, that we can only envy.”
However, we need to go further than auto-enrolment in order to trigger the necessary sea-change needed to save young people’s future pensions. Current forecasts suggest that while in 2004 there were four people in work for every one in retirement, by 2050 that ratio would have shifted to two workers for every one retiree. National Insurance contributions will soon no longer be able to cover pension liabilities.
In such a scenario, it is imperative that governments start to think seriously about how to increase the size of the pension pot. Finland offers one example of how things can be done better. Over there, the majority of state pension contributions are invested in closely-regulated insurance firms that pool them in an investment fund, instead of being paid to the exchequer. This strategy takes pressure off government coffers while providing greater returns on the individual contribution.
While boosting the percentage of contributions invested in funds, the UK also needs to substantially increase the amount of GDP it reserves for pension payments, especially in the midst of the current European-wide crisis.
If this seems like the stuff of fantasy, consider the fact that the UK ranks 24th out of the 25 member states of the European Union for expenditure on pensions. Or that the percentage of GDP allocated to public pension spending stands at just 5.4%, well below the OECD average of 7.0%.
It is the duty of young people to demand these changes now, before their future is mortgaged off and the state condemns them to poverty in old age.
Louie Woodall is Assitant Editor of the Young Fabians Blog