Is the welfare state system broken, and if so, what are you going to do to provide for your retirement?

Is the welfare state system is broken, and if so, what are you going to do to fund your retirement and elderly care?

When I was growing up in London there were different waves of migrants coming into the country. Many members of my extended family were coming over on the boat from Ireland, where there was little opportunity and widespread poverty. I also went to school with many first generation migrants from Cyprus, India, East Africa and the Caribbean.

Later on, I saw other waves of immigration from places like Uganda, after Idi Amin literally kicked out all of the Asian population, and the Philippines.

I noticed that many of them bought their own houses rather than relying on council housing, perhaps because this was not so readily available to them as it was to the indigenous population. 

Like some of my own family, they rented out part of their house or took in a lodger to help make ends meet. Sometimes, the rent they would and would often cover their mortgage and enable them to save money for another house. It was inconvenient in some ways and not as comfortable as having your own space to yourself, but they did what it took to get on.

They also had a higher tendency to start their own businesses, based on my anecdotal observations. Perhaps because they could not find a job which utilise their education and skills from their own country.

I also noticed that they worked harder than the average person and often had two or three jobs.

Most British people still believed in and depended on the so-called “cradle-to-grave” welfare state brought in after the war. They were told by the government that they will be looked after from the time they were born until they were buried.

Everything was meant to be free from healthcare, education up to university level to elderly care. People pay taxes and national insurance contributions which was supposed to provide for their pension in old age. They also had the safety net of the benefit system which meant that they were paid if they were unemployed or could not work.

During my early years in financial services, people would often say things like, “the government will look after me if I don’t have enough pension savings”, or “the state will look after my wife and children if I die with no insurance”. In many ways, they were correct. The state does provide benefits for people who retire without any pension, which seems on fair to all of those people who have sacrificed and saved for retirement.

Mature Times Recently quoted a report by Canada life that almost 2 in five pensioners or 38% of claimants receive less than £150 a week.

Can you live on £150 per week? You can probably survive on it but you can’t live comfortably on the state pension or benefits, which is why are you here of pensioners freezing to death in the winter or having to make the choice between food or heat. Most people blame the government but the fact is we all have the opportunity to work and say during our lifetime. Furthermore,, The amount most people pay in taxes during their lifetime hardly covers what the government needs to spend to keep everybody safe, healthy and happy let alone provide income and benefits for another 20 or 30 years in retirement. In other words, if someone on a low income was refunded all the taxes they’d paid during their lifetime it would not be enough to live on for almost as many years in retirement as they had spent in work. 

The welfare system is broken and unsustainable. This is why successive governments have had to change the rules and move the goalposts. Retirement ages have increased, people have to sell their homes to pay for elderly care in nursing homes and university education is no longer free in England.  

Most governments have had to borrow money to make ends meet based on the current expenditure, which means that the country is not paying its way as it has in the past. When we talk about the government, we are really talking about the money we all and businesses pay in taxes.  That’s it. There is no magic fund sitting there and there are no oil wells to subsidise us. The money through taxes come in and goes out.  

When the welfare state was devised just after the war in the 1940’s, it was estimated that in average people would live for less than 5 years in retirement – a large proportion of males died before they were 50 and a 70 year old seemed ancient! I know people in their 70’s now who look and act like someone in their 50’s. The actuaries then also calculated that the number of people in work would be able to support the number of people in retirement in the tax payer funded pay-as-you-go old aged pension system. There is no old state pension ‘fund’ put aside for you.

The above seventy-year-old assumptions are long out of date. People are now living far longer on average and there are now more people in retirement and ever before. More worrying, the ratio of working people to retired has changed dramatically.  

As in other developed countries, advances in medicine and diets have contributed to UK citizens living longer, a trend set to continue. By 2050, the proportion of the UK population aged 65 and over is projected to reach nearly a quarter at 24 per cent, up from 17 per cent in 2012, according to the ONS.

The fastest increases will be among the “oldest old”, with the proportion aged 85 and over forecast to treble from 2 per cent to 6 per cent.

Academics say these rapidly evolving demographic changes will affect everyone in society, not just the elderly.

An even bigger problem is that as the proportion reaching retirement age grows, the number of working age people will shrink as birth rates decline.

This is a concern because UK state pension payments are funded through taxation and national insurance contributions from those of working age. It could be described as some similar to a legalised ‘Ponzi’ scheme.

Tax revenue from those in work may fail to keep up with demand for social security — and governments will have to make tough choices, according to David Sinclair, International Longevity Centre UK in an article in the FT.

The number of working age people to every pensioner, or the “old age support ratio”, is forecast to fall to 2.9 by 2050, from 3.3 in the mid-1970s to 2006, or a 10% drop. That’s less than 3 people working to support one person in retirement and all of the other benefits as well as healthcare, social care, education, security and defence. I’m not an economist, but to me the figures just don’t add up!

“Tax revenue from those in work may fail to keep up with demand for social security and healthcare from an increasingly large proportion of people aged over 65 and out of work and who have poor health,” said Mr Sinclair. “This will force governments to make tough choices.”

This is already happening. Not unaware of the looming problem, the government has pushed back the qualification age for the state pension to 67 by 2028. The state pension age will equalise at 65 for women and men by 2018.

The government has also taken steps to address big shortfalls in private pension savings, through the automatic enrolment of eligible staff into workplace pensions.

Under this policy, 2 per cent of a worker’s qualifying earnings is saved into a pension, comprising a contribution from employer, employee and tax relief, rising to 8 per cent by 2018. However, the pension scheme is a defined contribution, rather than benefit, and returns and not guaranteed and will depend on fund growth, much of which will be stock market based.

Like Universal Credit, these policies are not vote winners. When the state owned BBC recently announced that it would be removing free TV licenses (which costs about £13 per month) for the over 75's, there was public outrage and a campaign has already started to reverse the decision. I expect the BBC will cave in under pressure and have to make cuts elsewhere.

Since the new pensions policy was introduced, 5m have been automatically enrolled. But there is a concern new “Freedom and Choice” reforms giving pension savers full flexibility to spend pension savings as they wish, such as on cars or holidays and not on a secure pension income, could undermine auto-enrolment.

“Before the age of 65, workers are actively nudged into pension saving through auto-enrolment,” says James Lloyd, director of the Strategic Society Centre, a think-tank.

If you would like to find out more about your pension entitlement go online or contact the Department of Work and Pensions (DWP) for a forecast.

You can top up your state pension or fund your own private pension scheme or employers’ scheme. In reality, most people are not saving nearly enough into their pension plan, as I explained in my earlier podcasts.   

As always, take professional independent financial advice because I am not your financial adviser.

So, is the welfare system broken? It may not be completely broken but it's certainly in need of a major refit or overhaul. Unfortunately, it is being patched up here and there like an old house because it is difficult for any government to tell it like it is and make those tough decisions.

I expect what will happen is that we will all muddle along for another decade until the government decides to take more radical action to deal with the pensions timebomb and elderly care problem. I haven't even started on elderly and social care, or dementia, which is another Pandora's box!  In the meantime, you better start rowing your own boat and not relying on the state or your employer to look after you.

On a more philosophical note, maybe the centuries old party is over for the west as the east grows stronger and takes more of our lunch? As the 16 year old Swedish climate campaigner, Greta Thunberg wisely put it, why should the rest of the world suffer so we can live in luxury?

Does all this make you worried? If so, good. We all need to wake up!

What can you do? Follow these three steps.

1. Step one, wake up.
2. Step two, start educating yourself on money and investing.
3. Step three, keep on learning about money and investing.

When I talked about migrants coming here years ago and buying houses and renting out the rooms, you might say that that was alright then but you can’t do it now, but you’ll be wrong.

The same opportunities to invest in property are available to you today and in fact it is much easier to get into property than it was years ago. 

Mortgages are easier to obtain and money is everywhere

Interest rates are lower

There are buy-to-let mortgages available in abundance

You can rent out a room tax-free up to £7500 per annum

There are training courses available where you can learn how to build a property portfolio even if you don’t have any money to put down.

The last point is the most important. When my family migrated to the UK there were no training courses and nobody tell you how to get a mortgage or buy a property. They had to learn by trial and error and mortgages were not so freely available.  

Since I started attending courses a few years ago the information I received literally open my eyes to the world of opportunity.

If you would like more information on a beginner’s property taster course, I have a limited number of complimentary tickets to attend an excellent course run by experts, which will give you a clear overview into the market. Click the link below or email me at Charles@charleskelly.net. 

To get further details on property courses, such as a one-day introduction to property investing, see https://ambassadorshub.co.uk/ambassador/index.php?aid=AMB0427 or drop me a line to charles@charleskelly.net