Monday, 20 March 2017

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.


  1. The State Pension Age consultation conducted last year suggested that pensions were affordable for some time to come. Their numbers seemed sensible to me.

    1. Thanks for the link vicarage, very interesting. I agree there should not be a problem in the shorter term, except the triple lock seems to be in the spotlight for after 2020.

      One submission from the Consulting Actuaries
      “On the assumption that, in aggregate, longevity continues
      to improve, whilst significant differences in life expectancy
      continue to exist between different sectors of society, we
      believe that the retention of a universal but rising State
      Pension Age will become increasingly difficult."

      I will look out for the final report in due course.

  2. It is quite depressing that there is so little pension provision. I think this is why the government went ahead with auto-enrolment, which is a great idea. The only issue with that is that to my eyes, the minimum contribution from both employers and employees are very low. Even more depressing that the average private sector contribution rate in 2015 in total is 4.5%. That is not very much in the grand schemes. Still, one have to hope that the contributions will be more realistic in time.

    1. Joe,

      Before auto enrolment was introduced, very few workers in the private sector were saving into a pension compared to over 90% signed up in the public sector. I agree the 8% level is the bare minimum when fully rolled out and should be at least 10% but it's better than nothing.

  3. Joe, as you say there is a minimum, which will increase over time as the concept beds down, but of course people can (unless they are very high earners) put in 100% of their earnings up to £40k a year. Their choice. Still more financial education required I think.

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  5. Just released today
    There are suggestions of adding an extra year to people 48 and older in the less aggressive case, 2 years for an aggressive rise. No suggestion that that pensions should be means tested or the private pension gap should be reduced from 10 years.

    1. Thanks for the update and links vicarage.

      It looks like the triple lock will disappear and be replaced with a link to average earnings.

      The SPA of 68 to be brought forward from 2044 to 2037 and the likelihood of 70 for people starting out today. Leave school at 18, work full time for the next 52 years and you get your flat-rate state pension - BTW, no extra for the 25% of wages going in NICs for the 17 yrs above the 35 needed for a full pension.

      I will be interested to see what the government decide to implement and hope to update the post later in the year.

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

    Savings require excess income. Young people dont have any as they have to either (a) pay rent to a buy to let landlord (often a pensioner) or (b) buy a house from an incumbent human with a massive mortgage. The difference is for the older generation the pension saving was taken care of through occupational (ponzi) schemes so they could get on with the everyday task of spending to fund the economy.

    Just a thought.