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German Pension Problems are Not Unique

Rainer Dniger is a German entrepreneur and currently President of the Confederation of German Employers Association. His name was in the news recently because of comments he made about the German pension system, which he described as 'on the verge of collapse'. He highlighted the fact that there are currently about 100 contributors for every 50 pensioners in Germany, but in 15 years there will be 100 contributors for every 70 pensioners, implying a massive and unsustainable increase in the financing burden.

Herr Dulger went on to suggest that the retirement age in Germany should be linked to increases in life expectancy. "It can't be right," he said, "that some people who go to work in the morning have only a little more money available than someone who doesn't go to work in the morning. That's unfair and sets the wrong incentives."

Whether you agree with Dulger or not, the fact is that most of the developed nations are facing a crisis of funding that will not go away. The primary reason for this is that as populations are ageing, birth rates are falling. According to the Health Foundation, in the next 25 years the number of people older than 85 will double to 2.6 million in the UK and they won't be replaced by younger people.

This is a problem that faces the whole of Europe, the US and China. The chart below from the EU clearly shows how the number of older citizens is expected to rise between 2019 (the solid bars) and 2050 (the bordered areas).

An unfortunate consequence of having more older people in the population is that it inevitably leads to greater government spending, not only on pensions but also on healthcare, NHS services, later life support and related areas. The share of total spending on healthcare is projected to exceed 10% of GDP within the next two decades. The chart below from the Institute for Fiscal Studies clearly illustrated this trend. You might argue with the detail and the assumptions used in these projections, but the message is clear - we face a significant hike in spending if we are to provide an adequate level of provision to our ageing populations.

The obvious question that arises is; how are we going to pay for all this extra spending? It's in the context of addressing this issue that Herr Dniger made his remarks, and it's a question being asked by all serious commentators.

Cut, Borrow or Grow?

The answers are not simple, and they're certainly not easy, but at the end of the day it boils down to a limited number of choices. Either we find a way to cut spending, or we borrow the difference between what we earn and what we spend, or we grow our income, or some combination of these.

The problem with cutting spending to the degree required is that any government that proposed it would probably not get re-elected. Can the voting public be convinced to accept a lower standard of living in retirement, or a poorer experience of healthcare in old age, for the good of the economy? Over recent decades the general expectation is that successive governments will continue to deliver ever-rising standards of living, and a reversal of this would not be palatable. A recent survey by Canada Life found that over half of people over 55 believe that the current State Pension is not generous enough, so cutting its value even further will not be electorally popular to say the least.

Borrowing is an option, but it does have a major disadvantage - it needs to be paid back, and in the meantime interest needs to be paid on the debt. It looks as though the exceptionally low interest rates that we have experienced over the last few years have come to an end, and we are getting back to the old normal. If interest rates rise significantly there is a risk that the debt becomes unmanageable. If you find your living costs exceed your income, borrowing more money on your mortgage to cover the difference isn't a solution unless you address the shortfall before debt spirals out of control.

Which leaves us with the growth option. This was Liz Truss's idea when she took over as Prime Minister, and the tragedy is that in itself it wasn't a bad idea, with broad support from across the political spectrum. However the manner of its execution was lamentable, and led to the stark realisation that it's not governments that ultimately decide on interest rates, it's markets, and their expectations need to be managed.

At the time of writing it remains to be seen to what degree we are about to enter a new period of austerity, and how future growth will be encouraged. Raising the required revenue by increasing taxes can work in the short term, but we won't be able to pay our future bills without continuing growth in economic activity, and that means encouraging businesses and individuals to take the steps necessary to achieve it.

Plan Your Own Future

Whatever route the government takes, though, it is probably safe to assume that maintaining your own personal prosperity in older age shouldn't be left to them. Creating your own Financial Plan designed to deliver the future you want has never been more important. If your Plan is going to succeed it needs to have a clear focus, a step-by-step series of actions that slowly and steadily take you towards your goals, and regular reviews to make adjustments and respond to changing circumstances. It's a formula that our clients have enjoyed for decades, and many of them are now living their planned-for lifestyles, unaffected by what governments, markets or economists decide.

If you would like to know more about creating your own personal Financial Plan designed to achieve your biggest goals, you can contact us here and we'll tell you the first steps to get started.

Andy Jervis, Chartered MCSI, CFP


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