Pensions nightmare – How Governments can solve it

Pensions Nightmare
Pensions Nightmare

Contractor Pensions Nightmare

How is the Governemnt going to deal with the looming pensions nightmare?

I read my Times this morning and saw an article in the business section which was about Sweden and how it solved its banking crisis.

However, in there was a little nugget about Pensions.

First of all let‘s point out the problems.

People Living Longer

Because people are living longer the pundits are talking about a future crisis. That’s because the Government will be paying out more and more in Pensions.

They are saying here and in America that this paying out Pensions will take a bigger and bigger percentage of the money the Government take in for tax.

There are all sorts of solutions such as forcing everyone to take out a private pension and raising the retirement age.

Swedish Solution

However, the Swedes have solved this one quite simply.

They have a pension pot and they only pay out what‘s in it.

They divide the amount they have in the pension pot by the number of pensioners. So, that is what they pay out to each individual pensioner.

That solves all the problems.

Increased Pension Pot

The pension pot should be increased each year either by inflation as it is at the moment (for individual pensions anyway) or preferably by average wage increases across the economy.

It also means that pensioners are in the same boat as the rest of us.

If the economy is doing well and wages across the economy are rising then pensioners‘ pensions will increase too.

If Wages are increasing by a small amount (or not at all or falling) then it should be the same with the pension pot.

That would mean that in good times pensioners‘ pensions would be rising at a good rate.

In times like these when inflation is higher than average wage rises then the pensioners would be hit like the rest of us.

Increased Along With inflation

The fact that pensioners‘ pensions are increased by the inflation amount is a huge problem for the UK Government at the moment.

It is one of the reasons that Government borrowing is rising.

Inflation has been running at between 2% and 5% for the last few years while wage rises in the economy have been negligible.

If pensions were linked to wages then the Government wouldn‘t have this problem as the adjustment would be automatic.

Average Wages

The Government picked inflation rather than average wages to increase pensions by, as normally wages rise by more than inflation.

However, with pensions tracking wages, pensions would rise when we can most afford it and would be pegged when we can least afford it.

It would also help when there are inflationary times as pensions wouldn‘t rise as much.

It would be a nightmare if inflation was rising far more than wages and Government pension costs were soaring as well.

Solution Works in Sweden

So does this work?

Yes, Sweden has already done it.

They were hit by the banking crisis same as us and the economy fell by 5% in 2009.

However, they have recovered while we haven‘t mainly due to three factors.

They nationalised the banks instead of taking major stakes in them in and earlier crisis and made sure that money flowed out to the economy.

They then re-privatised them.

They devalued their currency.

They made the changes set out above to Pensions.

Great Pensions Idea

It means that they have recovered while we haven‘t.

Across Europe they are now looking at the Swedish model.

But what a great idea about Pensions.

While we and the US are looking at what they call the demographic Pensions nightmare, Sweden has this solved.

And what a simple solution it is.

And yet it is so obvious.

Contractor Pensions

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