Of all the misfortunes we millennials like to chew over when feeling sorry for ourselves, one of our favourites is the notion we will have to work until we die. It came as no surprise to young people in the UK, for example, when the World Economic Forum last week urged the country to prepare for a workforce of octogenarians. Pensions? Retirement? Round-the-world cruises? We know these will be history by the time we are old. We have taken this wallowing a bit too far. The retirement prospects of Britain’s young people have brightened, thanks to a policy so successful that Germany, Poland and Ireland may soon follow suit. The outlook for my generation is still not good. But it is better than it was. This matters: fatalism is not conducive to planning for old age.
The first step towards improving your pension is to believe that you will have one. In 2012 the UK became one of the first countries in the world to require employers to enrol almost all employees automatically into a workplace pension. Employees can opt out but by default both they and their employers will pay in. The policy has not yet been fully implemented but the impact is clear. Between 2012 and 2015 the number of private-sector employees with a workplace pension surged from 5.4m to 10m. Young people benefited most.
The proportion of eligible 22- to 29-year-old private sector employees with a workplace pension shot up from 28 to about 80 per cent. Contrast that with the baby boomers. Their defined benefit pensions were vastly better than these new defined contribution schemes but they were less evenly spread. That led to pensioner “haves” and “have-nots”. Even at the peak of the defined benefit era 50 years ago, one-third of men and two-thirds of women were not members of any workplace pension, according to the Pensions Policy Institute.
By contrast 95 per cent of millennials are expected to have a private pension income in retirement. Generation X is arguably in a tighter spot: many 40-somethings were born too late to catch the defined benefit era but too early to benefit from a full career spent saving through auto-enrolment. That is the good news for millennials. There are three “buts” that take the gloss off. First, people are not saving enough into their auto-enrolment pensions. By 2019, average combined contributions from the employee and employer will rise to roughly 6 per cent of a full salary.
Yet the WEF says people need to save between 10 and 15 per cent in order to have pensions worth about 70 per cent of their pre-retirement incomes. Contribution rates (or other savings) will need to rise. This is particularly true since investment returns are uncertain, not to mention the gloomy outlook for the state pension. Opt-out rates are low but the test will come when mandatory contribution levels go up. More salary set aside for tomorrow means less to take home today. Young people have already suffered the biggest drop in real wages of any generation since the crash of 2008.
Employers also cite the cost of auto-enrolment as one reason they are handing out meagre pay rises. Second, auto-enrolment is designed for a traditional labour market of employers and employees. Yet about 15 per cent of the UK workforce is self-employed. Innovation is needed to scoop them into the net. Third, when experts predict the pension incomes people will need for a decent retirement, it is often assumed their mortgages will be fully paid. But the UK’s chronic failure to build enough homes has pushed prices out of reach for many millennials. They will buy homes later in life — or not at all.
On current trends, many will need to cover rent or mortgages with their pensions. Alternatively, they might use a chunk of their pension pots to pay off housing debt. Some will inherit property, of course, but the distribution of such legacies will be patchy and unequal. The dangers posed to the future of retirement by Britain’s festering housing crisis should trouble any policymaker feeling good about auto-enrolment. It would be a tragedy if one of our most successful policies falls victim to our biggest policy failure.