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Jan. 22, 2005 The US has recently joined the debate about paying for pensions. Until modern times it was perfectly reasonable for all workers to contribute to a general pension fund which took care of the current population of elderly. They knew that when their time came they too would be taken care of. What has changed? Firstly the proportion of workers to retirees has dropped drastically. Secondly society has an expectation that a pension should be more than a basic survival payment. So more money is needed every year, and it would be unreasonable for the declining working population to provide it out of their personal income. One way of dealing with the problem would be to fund pensions out of general revenue - all the sources of Government income. This funding could be in full or together with social security contributions from workers. This is quite possible and reasonable, although there are questions as to its efficiency. The opposite approach is to set up compulsory savings from workers' salaries into designated pension plans. It is also usual for an obligatory contribution to be made by employers into these individual plans. The weakness of individual plans is that not everyone is able to contribute to them. People at the bottom of the pile for whatever reason will still need society's help in the form of social security. The argument at the moment seems to be focussing on the transition period between a government scheme funded from current contributions and a fully privatised system. There will be workers out there who will not have enough years of work left to achieve a pension. And while they are contributing to their own future, who will be paying for current retirees? Actually the transition is a very small part of the real question, and could be fixed by any normally intelligent economist. As a naturally suspicious person, I wonder if this obfuscation of the debate is not deliberate. The real question lies in how the designated pension funds will be set up. Experience shows that in other countries when a privatised system has been set up, lots of friendly generous people appear who are willing to take your money (and your employer's contribution) in return for the promise of a pension in the future. And they will only charge you an annual fee of 1% or 2% of the total sum you have placed with them. Naturally, they only need a minimum of Government regulation because they are such responsible people - what could go wrong? Strange that this sort of institution is not making much noise at the moment. Perhaps they are quietly supporting the Government's effort and concentrating on shaping the regulations that will be needed. If the Government needs any help in selling the deal, I expect we will see a lot more of them. The finance industry stands to make A LOT OF MONEY out of a privatised system. They will end up with a substantial part of your nest egg - in UK or Australia you can be talking about annual fees that reduce your final valuation by 30%. There are less greedy companies around that you could turn to, but in Australia at least, changing companies involves such big 'administration fees' (read disincentives) that it is not worth doing. The pension companies are like cows in clover. Recently they have not been doing so well with their investments; savers have had the value of their saving go down year on year. To rub salt into the wound, after having lost you money, they still get to charge that iniquitous annual fee. Sure a privatised pension scheme is not a bad way for a nation to provide for its future. But it will have to be VERY STRONGLY REGULATED AND INSURED, and it should be ADMINISTERED IN THE INTERESTS OF THE SAVERS, NOT THE PENSION COMPANIES. Also, to cover the needs of the less fortunate part of society SOCIAL SECURITY WILL STILL BE NEEDED. So go ahead with a change of system; it will undoubtedly be needed at some point in the future. It will be essential to include the three points in capitals above. But most important of all, make sure it is done by a Government that has the interests of its voters at heart, not the interests of its backers. And I don't think this one qualifies. ------------ About the author: Eric lives in tropical Queensland and writes books - some naughty, some nice - that can be found through Renaissance eBooks (renebooks.com) He reads widely and when he is not thinking about lunch, worries about the state of the world. Email: ericge@westnet.com.au Tell a friend about this site! ------------ All articles are EXCLUSIVE to Useless-Knowledge.com and are not allowed to be posted on other websites. ARTICLE THIEVES WILL BE PROSECUTED! |
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