This post was going to be about pensions. People don't save enough for their old age. We know that, but why? The answer is I believe in two parts and the government - by which I mean governments in general and not just the current bunch - can do something about both. And although I happen to believe that we need less government, not more, in this case it is a legitimate use of their power.
First, people don't save enough because they discount the future. This is not only about the time value of money but about uncertainty. After all a lot can happen before you get old; you might win the lottery, you might become famous, you might earn an enormous income by being clever and working hard. You might also die and all your hard earned savings would benefit you not at all.
Now if we lived in a society which provided no safety net, where if you failed to save or were unlucky enough not to have some friends or relatives to look after you, you would simply die starving in the gutter. But we don't, and I don't think there are many advocates of such a free-market system around today. In the context of pensions this means that the Government should act to correct the distortion that logical individual decisions, in this case not to save enough for their old age, creates in society as a whole so that the overall good is greater than the sum of the individual goods. Governments then should force us to provide for our old age. The only question then becomes how; through a publicly funded scheme or privately. By the way I am not discounting the current old age pension arrangements as an option, whereby old people are supported by the younger generations through tax-funded pensions, but I don't think this is now an acceptable way to address the issue especially as we cannot, as was probably the case when state pensions were first introduced, assume that the real standard of living will increase indefinitely.
The second reason for the Government to intervene is because market places do not work perfectly and in this case prevent people from saving effectively. Why are pensions providers able to charge rates of 3% (or more) for provision of services, when less than 1% is more than enough in, for example the Netherlands? With 3% fees (forgetting the profits generated by churning investments) and 2-3% inflation, real returns are required of 6% or more to generate any income whatsoever. And this is what some providers set as their "target". I believe but please correct me, this is also around the long-run yield on stock-market investments. Anyway the point is that you cannot live on that and maintain the value of your savings, even with £1mln in the bank.
Governments have provided many different tax-efficient saving schemes over the years but the returns on these also seem insignificant, unless you are able to take very significant risks in a large and broadly-spread portfolio. So the only options available to most people are high street cash or share ISAs where there returns are wholly inadequate, or putting your money with a financial institution which suck up most of the returns on your savings in their fees.
Governments can address this by putting ceilings on the fees that institutions charge for this kind of service. What about free enterprise you will cry. Well that does not stop some people offering enhanced services for a higher fee, but I am sure there is a huge and profitable market out there for low-fee long-term savings institutions. They already exist but the financial services industry has persuaded the present government to bias the recent pension legislation against them, in order to protect their fat fees and high living. Well that is free enterprise for you.
But this blog is not about pensions, it is about my lousy "3" telephone service and the still worse "my 3" customer services. However that better be reserved for another day.
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