More and more people are complaining about the fact that the public sector are still enjoying generous final-salary pensions while the private sector has mostly moved to much more modest defined-contribution schemes.
The solution recommended by most commentators is to reduce public-sector pensions.
This, however, is not likely to be enough for a comfortable retirement for most people. Pensioners in the UK are already much worse off than those in other developed countries.
The way I see it, defined-contribution schemes (which basically means you give people some money to invest in shares, without any guarantee how the investment will turn out) are far too risky for normal people.
Final-salary pensions, while great for the workers, are far too risky for companies, and they put established companies at a disadvantage compared with newer companies and companies in other countries without similar pension systems.
So a third way is needed. I would suggest something along the following lines:
- Set up some big pension organisations/companies (let’s call them POCs) to take contributions from workers and companies, invest this money and pay out generous pensions to retired workers.
- Make it obligatory for all companies, for self-employed people and the public sector to pay in a specific percentage of salaries to one of the POCs.
- Make sure sure the POCs insure each other and give them some sort of state backing to ensure people can be confident their pension will not suddenly disappear.
In this way, public and private sector workers would have equivalent pensions, and old companies wouldn’t struggle to compete with newer ones.
Also, when people change jobs, their pensions could still remain with the same POC, instead of having small pensions in many different places.
The reason I’m suggesting setting up multiple POCs rather than a single one is to avoid having an organisation that is too big to fail and too big for the state to save.
Can anybody spot any flaws in my suggestion?