However, I still encountered Moneybox presenter Paul Lewis, who was brought in by BBC News on Sunday morning to give his considered opinion on pensions and annuities. After rolling out some numbers that showed how drastically the returns on annuities have fallen in the past 15 years (although the most horrific number he gave was that the average saving on retirement is only about £40,000 – a sum that would currently buy you £26 a week index-linked if you retire at 65) he repeated the standard group-think that this showed how important it was to start saving for a pension as soon as possible.
Synchronistically, Merryn Somerset-Webb, someone who is not afraid to flout the conventional wisdom, pointed out in the weekend FT that this theory is probably wrong. Why? Simply because, assuming that you start work at 21, from the age of 21 to about 35, it’s far more efficient in terms of life EV to spend your money than to put it into a pension that you might not even live to collect. It makes no sense to give up 80% of your discretionary spending when in your 20s so that you increase that discretionary spending by 50% when you get to retirement age. All that this does is exchange a lot of misery now for a bit more happiness later on.
And all of this ignores the fact that there’s a solid argument for spending money while you have it, because deferring gratification now for gratification later on is intrinsically something of a gamble. First, you are punting that you will live to enjoy that later gratification. Second, you are assuming that the gratification you are giving up now will be repaid (with interest) when you are older. For a number of reasons, the odds are actually against this rather than in favour of it. Inflation may work to penalize savers and reward borrowers. Your pension provider might go bust. The tax regime may change to penalize your thriftiness. And, finally, the current system is such that if you spend everything you earn, the government will pay you more when you get old than if you save money.
Even the much-touted “tax-break” in pension saving is nothing of the kind. It’s actually just a tax-deferral. Admittedly if it serves to even out your tax-payments (i.e., keeping you out of the upper tax-bracket when you are earning, or not pushing you into any tax bracket when you retire) then you are better off. But if you are paying the standard rate no matter what when you are saving for your pension, and if your income is into the standard rate when you retire, you are no better off at all.
I was pondering all of this as I looked at the 4.5% inflation figures this morning. The Bank of England continues to say that inflation will fall back over the next couple of years, but I have my doubts. The BoE line is that the current level of high inflation relative to the 2% target is nothing to do with being demand-led or wage-push; it’s because clothing, energy and commodities are getting pricier. What the BoE misses is that after a certain period of time when inflation is at this level (and we are approaching that point soon, I think), wage-push begins to kick in. The counter-argument to this is that there is a surplus of labour and that it’s not like the old union days when organized workers had pricing power.
I think that both of these arguments are flawed. First, even if there is a surplus of labour, when the kids and the wife and a pint of beer and a football match are all costing more, the employee gets to the point where the pressures to ask for more money outweigh the rational knowledge that there is a labour surplus. He (or she) still asks for more money, or is more willing to move to a job that is offering more money.
Second, although union pricing power has fallen, look at it from the employers’ point of view. There is still a shortage of the right kind of labour, and it’s a lot cheaper to pay a 5% pay rise than it is to find a replacement for a useful and competent employee. And finding new employees of the right level of competence is not cheap. You’d probably end up having to pay what the old employee was asking for anyway.
In other words, I see wage-push inflation (resulting in a new kind of cost-inflation for suppliers) taking over just as the commodities inflation dies away.
This continues to be baddish news for savers, in that real interest rates are likely to be negative for a good three or four years, possibly longer. As I’ve written before, the battle for “who pays” for the profligacy of the past decade has already been won. The savers will pay a far higher proportion than will the people who caused it – the borrowers (stop blaming the fucking banks, for Christ’s sake; no-one in the UK was strong-armed into borrowing the cash. They went in there saying Gimme Gimme Gimme.
Oh, and Paul Lewis really does have a marvellous haircut – something like a cross between Einstein and an arts professor.
PS: Angela Merkel went on German radio this morning to allay Greek debt fears.
"The top priority is to avoid an uncontrolled insolvency, because that would not just affect Greece, and the danger that it hits everyone - or at least several countries - is very big.
"I have made my position very clear that everything must be done to keep the eurozone together politically. Because we would soon have a domino effect".
Market responded promptly by pushing up yields on Greek 10-year bonds to 24% a year. The key wrod there was surely "uncontrolled", followed by the admission that there wasn't actually any procedure in place for the option that was not rulled out, a controlled insolvency.
Meanwhile the ECB is in the middle of an internecine battle as the Germans are beginning to ask what Trichet is doing spending billions of euro to keep down italian and Spanish bond yields. He's tried it before (with Greece) and achieved nothing bar losing a couple of hundred billion euros down the new drachma toilet. If it failed with Greece, what on earth makes him think he can succeed with Spain and Italy?