Friday, 15 April 2011

Retirement Riches?

The Employment and Social Security Minister, Deputy Ian Gorst, is currently suggesting that the age of retirement should be increased in order to maintain enough funding for the Social Security Pension scheme.  This means that people would have to work longer than 65, the age of retirement. But in fact, 65 is not the age of retirement for a fair number of individuals, because they are cheerfully taking early retirement at 63 or 64, and turning contributions into pension payouts, depleting the pension scheme.  This anomaly does not seem to have featured in the recent announcements. This is not retirement because of invalidity; it is simply a healthy working individual choosing to retire early.

This is how the scheme works - the States web site explains it here:

Can I claim my pension early?  If your pension age is 65, you can choose to take your pension at any time between age 63 and 65.  For each month the pension is paid early, your pension will be reduced by 0.58% of your pension entitlement. If you have built up a 100% entitlement and you choose to take your pension at 63, you will be paid approximately 86 % of a standard rate pension (24 months x 0.58% = 13.92%). Once you have decided to take your pension early, you will stay on the reduced rate for life. We strongly recommend that you take this into account in planning for your future. 

So let's see how this works in practice. Take the case of someone who is married and paying the full Social Security Contribution limit and retires at 63 years old.
Their pension would be around £15,080 a year, but because they've retired early, they take 86.08% of that, so get around £12,980 instead, a permanent loss of around £2,100 - obviously more if the pension rises.

Instead of the individual paying 2 years Social Security contributions to the States, of around £460 per month - £11,040 over two years - the States are paying them.  The pension paid out to the individual  is around £25,960 over two years, so they are around £37,000 better off (by the time they reach the recognised retirement age of 65), and the States are that sum worse off.
Obviously there is a "break even point" when what they get in terms of pension matches what the States has paid them over these two years and from then on they are actually losing out. After that, the States begins to benefit from their early retirement - as long as they haven't died in the meantime.

If the pension remained the same, it would be something like 18 years before the break-even point is reached (£37,000 / £2,100). Obviously they lose a bit more if the pension rises, but it's still likely to be in the order of 15 years - so they will be around 78 before the States benefits from this bargain. In the meantime, they have depleted Social Security by an initial "sting" of £37,000 over the first two years, which simply would not have happened if they couldn't take early retirement.

And this goes back some way - to the Social Security (Amendment No. 14) (Jersey) Law 2000, which introduced the provision:

Provision for early retirement, with the option to claim an old age pension between the ages of 63 and 65, if the relevant qualifying conditions are satisfied, subject to the amount of old age pension being reduced by 0.58 per cent for each month between the month of claiming the old age pension and the month of reaching age 65.
The Actuarial Review of December 2000 noted that:

The contribution rate which is required to break even on a pay-as-you-go basis is heavily dependent on the relative future numbers in the population at working ages and over pension age. In 2000 there were approximately 4.9 persons of working age for each person aged 65 years and over but this ratio is projected to fall.

So there was an awareness even in 2000 of the incipient "demographic time bomb", even after the Law had been changed.
The interim report on policy review in 2004 noted that:

Already, contributors can take a reduced pension anytime from age 63 so it would make sense to enable people to continue working in order to achieve the full qualifying period of 45 years and also build additional entitlement, say, to the age of 68 or even 70 if they are able.

A more flexible approach, on the lines of a 63-68 pension scheme could help to reinforce the message that retirement should be more flexible in future and give people more choices depending on their health, financial and other circumstances.

In discussing all these options, the Committee was mindful that the contribution period was already amongst the longest worldwide and did not want to see any increase at this stage. The Committee also recognised that increasing the age at which the Social Security pension is paid would have the greatest impact on the lowest paid who are unlikely to have other pensions or limited savings on which to retire earlier.

But between then and now, no steps have been taken to address the issue. From its inception under Terry Le Sueur who was President of Social Security Committee until 2002, and through Paul Routier's time as President from 2002 until 2008, and Deputy Ian Gorst from 2008 until the present day, no one seems to have looked at the worsening situation (of an aging population) and calculated how much worse it was because of the early retirement option. They appear to have just buried their heads in the sand, and let things run cheerfully on.

The question that needs asking is: how many people have taken early retirement under this section of the Social Security Law since April 2001, when it came into force (with separate figures for single and married)? Then we will start to have a handle on just how much money the early retirement scheme is costing the pension fund, and whether it can afford to continue.

Remember that the States will not have broken even on some of these early retirements dating from 2001 for another three or four years.

As the 2004 review noted, increasing the age of retirement would hit the lowest paid. It is really only the well off who can afford to retire early and before increasing the statutory age of retirement, perhaps the unfairness and cost to the States of this scheme should be addressed? Effectively, the Law is subsidising the retirement plans of the wealthy.


Anonymous said...

Brilliant post Tony

"Heads in Sand"

You have it in one

Anonymous said...

Excellent post! It was the belief that the fund was unsustainable that made my husband apply for his pension at 63. As for me,when I started work I expected to retire at 60, now it's 67, goodness knows what it will be in 20 years time! Frankly I no longer expect to receive a states pension ever.