Here’s the conventional wisdom on pensions: you’re a weak-willed and short-sighted fool who isn’t saving enough, and as a result you will spend your retirement in poverty. The US press is loaded with hand-wringing on the subject – largely, although not exclusively, based on “research” from companies who sell pensions and investments. In the UK, the definitive statement was made by Adair Turner’s Pension Commission in 2004: “Most people do not make rational decisions about long-term savings without encouragement and advice.” Ouch.

The sense of impending doom has been deepened by the realisation that both corporate pension schemes and implicit pension promises from governments may have too little cash behind them. That may be true, but it is only indirectly relevant to the question of personal pension saving.

One of the results of this nervousness has been a search for ways to encourage people to save more: tax breaks and enrolment by default, for example.

But look more closely, and it is far from obvious that there is a serious and generalised problem with personal pension saving. It’s hard to say for sure, partly because the future is unknown and partly because it’s hard to say exactly how much money should be in a sensibly funded pension. For example, if someone is making £60,000 a year, what pension income would count as sensible? £75,000 would probably be excessive – but what about medical and long-term care costs? £25,000 a year seems low, but many people get by happily on less.

The remainder of the column can be read here. Please post comments below.

June 7th, 2008 in Undercover Economist | Permalink