National Debt and State Pensions - Start Saving

I am not an economist - far from it, but one thing that niggles away at the back of my mind is our ever increasing debt and how this may impact on society in the future. How can we afford state pensions and welfare provision when they seems to increasingly rely upon borrowing the money to fund them?

Our national debt is the total amount of money borrowed by our respective governments. It is mainly created by the issue of government loans called gilts which are purchased by the Bank of England, the private sector such as insurance company pension funds and also other governments from around the world seeking a safe home for their money.

The debt currently stands at £1.7 trillion and has been increasing year-on-year since 2001 when it stood at just £300bn. The amount we borrow each year peaked just after the financial crisis at £150bn in 2009/10 and has been steadily declining each year however we are still spending £50bn more than we receive.The deficit is predicted to fall to £20bn by 2020...that's £30bn more than was forecast in 2016 - the goalposts seem to keep moving. The politicians are quick to assure us that the deficit is falling but slow to point out that the total debt continues to rise.

Like all borrowers, our government has to pay interest on the debt it creates. In 2001 we were paying around £20bn per year in interest and we are now paying around £39bn which represents around 5% of total spending and more than we spend on the likes of social service or transport.

Since 2007, bond yields have been falling which means the interest on the debt has been lower than it would have been. 10 Yr gilt yields are currently around 2%. However, this could easily reverse which would result in higher debt repayment costs.

The Consequences for State Pensions

Having paid into the system for the past 45 yrs, I will finally become eligible for my state pension next year - whoo hoo!!

I am not overly concerned about the governments ability to continue with state pensions in the shorter term. However, unless there is some signs that UK plc will start to live within it’s means PDQ, I do wonder whether the universal state pension can be afforded in its present form for those starting out today.

Spending on pensions has doubled in the past 10 years to £157bn and this dramatic rise looks likely to continue. The combination of far more people living longer and the squeeze on welfare provision could create quite a toxic time bomb down the line.

When I was looking at research for my book ‘DIY Pensions’, I was a bit surprised to see that around half of all workers had made no private pension provisions and would be solely relying on the state pension. Of the remaining 50%, the average pension pot was only £35,000 which obviously will not provide much additional pension - £100 per week at best.

Start Saving

The government have been trying to cut back on public expenditure in recent years with their so-called austerity measures but they are having to increasingly implement spending priorities - NHS, Welfare etc. and the debt is still rising. With an ever increasing population, people living longer and all the uncertainties of leaving the EU, the pressures are building.

If this continues, which is clearly more likely than not for the foreseeable future, there will be a point where a future government will question whether it can continue with universal pensions for the relatively wealthy when more money is needed for social services and pensions for those who have no other provision - in other words, some form of means-tested cut off point.

I am not saying this will happen, merely that it must be a possibility.

It will therefore be incumbent for those younger people to prepare for such a possibility and take saving for their retirement much more seriously.

In a recent article on reasons to save, Morgan Housel writes:

“You don’t need a reason to save. Are you saving for a house? Or a vacation? Or a new car? No, I’m saving for a world where curveballs are the most common balls thrown. Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Savings is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Yep, I will second that….

What do you think - leave a comment below and share your thoughts with others.