The Unique Property Site Blog

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An Almost Universal Wage

  Let's follow on from last week's blog where we saw that over the next decade rather a lot of people are going to be made redundant. With large swathes of the population out of work, how is everyone going to survive?

Let’s start by looking at what happens already. One section of the population is already out of work permanently. I mean, pensioners. How do they get paid?

The odd thing is, nobody seemed to have considered a pension fund at all. Certainly not in the UK. Instead, all we got was an idea, and a reason for collecting another tax. Pensions would be paid out of general taxation. In other words, as far as I can see, there was never a proper pension scheme set up in the UK.

What’s the end reason of the system?

Answer: to provide me with an income when I reach (let’s say) the age of seventy. So let’s start right there.

We start by having to make an assumption, and that is the most difficult part of the computation. How much money is going to be needed to provide a worthwhile payout in seventy years time?

Seventy years ago a pension of about £5 a week would have probably been adequate. Today £5 will buy you two beers. Luckily, there is a way of coping with this problem. It’s the value of money that keeps falling, but the value of things vis-a-vis each other tends to remain relatively stable.

To put that in more solid terms, if two beers now cost £5, and I earn £20,000 a year then I’m willing to bet (and I haven’t checked) that seventy years ago if I would have been earning £250 a year those two beers would have cost me about six pence.

Well, I’m rather chuffed. I thought it my duty after all to try and check, and came across an interesting online thread. Here’s the url: http://www.sheffieldforum.co.uk/archive/index.php/t-128554.html

It seems a beer would indeed cost about six pence. But of course, that was six old pence, which in today’s money would be just under three new pence. In other words, two beers would, as near as dammit, cost the equivalent of six new pence. Things in relation to each other tend not to move too far out of that relationship. In other words, using currently available statistics it would be relatively easy to create two variables which would assist in creating a desired retirement figure to work towards. The two variables would only need to retain a stable relationship between each other. If they did not, then adjustments could be made to realign the figures for future computations.

I’m going to assume I want a pension not much less than my current income. Looking at current pension schemes one relationship seems to stand out: retire with two thirds your last salary.

I am told the average wage in the UK at the time of writing is £24,000 a year. It doesn’t matter if that figure is wrong, I am concerned here with methodology, not exactitude. Do remember that £24,000 salary is before tax. After the various deductions the take home amount is probably closer to £19,000. Two thirds of that is about £13,000.

I am going to assume that a pension fund should be started at birth, and that it should be ring-fenced in a fund that cannot be touched until the person reaches the age of thirty-one. At that age the fund can be kept untouched and allowed to continue growing, or the annual dividend could be taken and used as pension income.

We have to link two figures together; the average inflation rate over a period, and the average rate of return on the invested funds. Those figures have to be kept in a relatively tight relationship. That means we can make a reasonable assumption as to the figure needed to provide the pension amount mentioned above.

So what would provide an income, or dividend, of £13,000 a year today?

Assuming a 5% return on capital invested, the figure would need to be £260,000.
Assuming the relationship between inflation and ROI can be kept reasonably linked this should be possible. In any event, I note that a 5% return is not particularly difficult to achieve. I don’t have a single investment that produces less than 8%, so it should not be beyond the wits of a professional investment committee to do better than me.

When a child is registered after birth the government will pay the sum of £60,000 into a pension fund for that child, that will be commercially run (not by the government) along the lines of a sovereign fund for the exclusive use of the new arrival. That fund will be invested in some form of securities so as to produce capital growth and reasonably high dividends consistent with a cautious fund.

That increasing sum will be locked in until the person reaches the age of thirty-one. If the person dies before reaching that age the amount in the fund will revert to the government’s pension fund (the Sovereign Trust), and will be available for future persons to receive the initial starter payment. As time goes on and inflation eats away at the value of a fiat currency, that figure will itself have to rise.

I am going to assume that one way or another the fund will produce at least 5% a year. That is easily achieved at the moment by investing in a mixture of solid companies, property markets, and new technology. If the figures I am using don’t prove to be good enough, then they will need to be adjusted so they do produce the right end product.

At the age of thirty-one our pension person can now access their pension fund. This means s/he is entitled to stop work and laze around for the rest of his/her life. S/He will not be entitled to any state benefits, such as job seekers allowance or sickness benefit. S/He will be assumed to be a pensioner in receipt of his?her pension and no longer dependent upon the state.

The person in my example would not have to collect the pension, they could carry on working as long as they liked, even until death somewhere in the eighties should s/he so wish, or they could just take out what was needed at various times.

No-one would be allowed to take out more than a pre-determined ratio of available funds to the underlying trust fund yield. For instance, one would not be allowed to deplete the underlying fund by more than the amount the fund would need in order to pay out the pension prescribed.

When the person died their fund would revert to the Sovereign Trust, and in this way the pension fund would, over time, be able to up its ratio of payments to the claimants, or at the very least, be able to keep up with the rate of inflation. The fund would always increase in value, whereas with the current scheme the (notional) fund is always in debt.

The result would be a pension scheme that not only functions properly but one that probably makes surplus money. It would also mean that no-one between birth and the age of majority (currently eighteen) would be eligible for state support as those of working age would be the responsibility of their parents until they reached majority. Similarly, all those of age thirty-one and above would be taken out of the support system because they would be deemed to have their own pension which should be sufficient to support them. This would cut the social security bill by a large amount.

This scheme would also generate a very healthy investment pot. After all, the original tranches of £60,000 would have to be invested somewhere. It would be nice if a significant proportion of this funding was invested in forward-looking technology, and most certainly in companies registered in the UK.

Such a scheme would also be in place in preparation for the massive amount of job losses there are likely to be once robots and androids have reached the capability to do most of the jobs currently available.

That time looks to be just down the road, or rather like right now. In fact we needed to start planning for mass redundancies some time in the past. After all, it isn’t as if this situation was difficult to predict.

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