Prediction – Page 3 – We Know Zero

I don’t know who the winners and loser of the 2050s will be and neither do the PPI

06. April 2016 · Write a comment · Categories: Demographics, Pensions, Prediction

For a brief period this week, before the Panama leaks brought everyone back in the room, one of the BBC’s main headlines was that a change to the UK State Pension was projected to make around three-quarters of people currently in their 20s and two-thirds of those currently in their 30s worse off than under the current arrangements. Figures of £19,000 and £17,000 “over the course of their retirement” were bandied around.

The reason the analysis had been carried out by the Pensions Policy Institute (PPI) was that the Department of Work and Pensions (DWP) is required to carry out an impact assessment of such proposed changes and had given the PPI the task.

First of all, the full summary of the analysis, coverage of which on the BBC has at least started to become a little more measured by today, is as follows:

As you can see, the numbers that came out were weekly losses of up to £17 per week for some groups and weekly gains of up to £13 per week for others. These numbers were themselves based on complicated projections about how benefit changes would be phased in and also how much the State Second Pension would pay people many decades into the future (the DWP paper can be found here). They were then aggregated by multiplying by the number of weeks in retirement until the pensioner was expected to die, based on the current State Pension Age timetable and the principal projections from the ONS 2015 Life Tables. The total amounts expected to be paid to people in retirement, however, were not (for those in their 20s this would be around 24 x 52 x 155.65 (the start rate for the new State Pension) as a minimum = £194,250 in 2015 terms). Neither was any explanation made of just how many years people were being projected to live. For £17 a week to translate into £21,000, the person currently in their 20s will need to be in retirement for nearly 24 years. It is not clear exactly when this person is expected to retire: the current tables only go up to a date of birth of 6 April 1978 (when State Pension Age is expected to be 68) with a vague intention to increase it to 69 by the late 2040s. An assumption of a retirement age of 69 looks consistent with the projections, which indicate a life expectancy at that age of 22.95 years for males and 24.81 years for females born in 1995.

And that last bit leads me on to why this particular news story is in my view just foolish. I tend to get a bit crotchety whenever anyone projects anything as a fact to a date beyond my personal life expectancy (less than 33 more years, according to the ONS). We are talking about people being worse off in the 2050s and 2060s. Here are a few more projections for you with those kinds of timelines:

World population will be 9 billion by 2050 (UN – currently it’s 7 billion)
Total energy demand in CO2 equivalent doubles from current levels by 2060 (IPCC)
Banking assets in London exceed 9 times UK GDP by 2050 (Mark Carney, Governor of the Bank of England)
60% of government bonds across all countries will be classified as junk by 2050 (Standard & Poors)

The vast majority of people are going to be better off who retire in the next 15 years (at least in terms of their State Pension), as will most people retiring in the decade after that. Beyond that we are in the region of the unknowable – almost certainly a very different-looking world which will have required several further adjustments to state pensions before we get there. So please let’s not waste time having foolish arguments about made up winners and losers.

Simplicity, transparency and personal responsibility

31. August 2015 · Write a comment · Categories: Actuarial, Defined Ambition, Demographics, Economics, Pensions, Prediction, Regulation, Risk

The Treasury is consulting on the tax relief that should be available in future for pension schemes and their members. The principles for any reform that it has set out are:

it should be simple and transparent;
it should allow individuals to take personal responsibility;
it should build on the success of automatic enrolment; and
it should be sustainable.

Simplicity, transparency, personal responsibility and sustainability mean different things to different people, which means that the precise meaning of these principles will depend on the politics of the people proposing them. However the words themselves are difficult to argue with, which is presumably why they have been chosen.

It has then set out 8 questions that it would like answered in response to its consultation. The consultation ends on 30 September. I have set out my responses below. I hope that they will sufficiently incense one or two more people into making their views heard, before the chance disappears.

1. To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension?

On this question I think I agree with Henry Tapper at the Pension PlayPen. He says the following:

In summary, millions of pounds of tax relief is wasted by the Treasury helping wealthy people avoid tax…Incentives are available to those on low earnings who pay no tax, but this message is not getting through, we need a system that resonates with all workers, not just those with the means to take tax advice.

I then think I agree with the following:

The incentive should be linked to the payment of contributions and not be dependent on the tax or NI status of the contributor – if people are in – they get incentivised.

That would certainly make the incentive to the pension scheme member clearer and potentially easier to understand. The other simplification I would support would be the merging of income tax and national insurance contributions – many of the sources I have referenced below are trying to solve problems caused by the different ways these two taxes are collected. This simplification would be an essential part of any pension reforms in my view.

2. Do respondents believe that a simpler system is likely to result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension?

This is the invitation to support TEE (ie taxed-taxed-exempt, the same tax treatment as for ISAs). I have up until now been persuaded by Andrew Dilnot and Paul Johnson’s paper from over 20 years ago that this was not a good idea. This pointed out that the current EET system:

Avoids problems with working out what level of contributions are attributable to individuals in a DB system
Does not discourage consumption in the future relative to consumption now

I have changed my mind. The first point has already been addressed in order to assess people against the annual allowance, although this may need to be further refined. The second point is more interesting. As Paul Mason has pointed out in Postcapitalism, the OECD 2010 report on policy challenges, coupled with S&P’s report from the same year on the global economic impacts of ageing populations point to the scenario pensions actuaries tend to refer to when challenged on the safety of Government bonds, ie if they fail then the least of your problems will be your pension scheme. The projections from S&P (see bar chart above) are that 60% of government bonds across all countries will have a credit rating below what is currently called investment grade – in other words they will be junk bonds. In this scenario private defined benefit schemes become meaningless and the returns from defined contribution schemes very uncertain indeed. A taxation system which seeks to extract tax on the way in rather than on the way out then looks increasingly sensible.

I think that both the popularity of ISAs and the consistently high take up of the tax free cash option by pensioners, however poor the conversion terms are in terms of pension given up, suggest that tax exemptions on the way out rather than on the way in would be massively popular.
3 Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions?

Based on my comments above, I think the whole idea of personal responsibility for saving adding up to more than a hill of beans for people currently in their 20s may be illusory. People do take responsibility for things they can have some control over. Pension savings in the late twenty-first century are unlikely to be in that category.
4 Would an alternative system allow individuals to plan better for how they use their savings in retirement?

As I have said I favour a TEE system like ISAs. I think some form of incentive will be required to replace tax exemption, such as “for every two pounds you put in a pension, the Government will put in one” with tight upper limits. The previous pensions minister Steve Webb appears to broadly support this idea. Exemption from tax on the way out (including abolition of the tax charges for exceeding the Lifetime Allowance) would also aid planning.
5 Should the government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be treated?

I think this is inevitable due to the fact that defined contribution (DC) schemes receive cash whereas defined benefit (DB) schemes accrue promises with often a fairly indirect link to the contributions paid in a given year. In my view taxation will need to be based on the current Annual Allowance methodology, perhaps refined as suggested by David Robbins and Dave Roberts at Towers Watson. The problem with just taxing contributions in DB is that you end up taxing deficit contributions which would effectively amount to retrospective taxation.

A further option discussed in Robbins and Roberts is making all contributions into DB schemes into employee contributions. I would go further and apply this to both DC and DB schemes – a sort of “reverse salary sacrifice” which could be encouraged by making the incentives on contributions only available on employee contributions, which would then be paid out of net pay. Any remaining accrual contributions made by employers in a DB scheme would be taxed by an adjustment to the following year’s tax code.
6 What administrative barriers exist to reforming the system of pensions tax, particularly in the context of automatic enrolment? How could these best be overcome?

I think everything points to the need for the retirement of DB for all but the very largest schemes. It would be better to do this gradually starting soon through an accelerated Pension Protection Fund (PPF) process rather than having it forced upon us in a hurry later in the century when PPF deficits may well be considerably higher than the current £292.1 billion.
7 How should employer pension contributions be treated under any reform of pensions tax relief?

As I have said, I think they should be converted into employee contributions based on higher employee salaries. This would make it clearer to people how much was being invested on their behalf into pension schemes.
8 How can the government make sure that any reform of pensions tax relief is sustainable for the future.

They can’t, and any change now will almost certainly be revisited several times over the next 50 years. However, systems where people feel they can see what is going on and which are tax free at the end are currently very popular and I would expect them to remain so for the foreseeable future. That takes care of political sustainability in the short term. What about longer-term economic sustainability? Faced by an uncertain and turbulent next 50 years where I have argued that personal responsibility (rather than communal responsibility) for pensions will seem increasingly irrelevant, I think what I have proposed will allow us to transition to a system which can be sustained to a greater degree.

We are entering what may prove to be a traumatic time for the world economy if Postcapitalism is even half right. Pensions taxation seems a good place to try and start to move our financial institutions in a more sustainable direction.

Nick Foster is a former pensions actuary who now lectures at the University of Leicester

Does this meet the definition of democracy?

24. April 2015 · Write a comment · Categories: Prediction

The result of the forthcoming General Election is not in much doubt it would seem. Eight different polling organisations’ latest polls are shown above, and the similarities between them are so much more striking than the differences. It appears that we will be going through the motions of a process which is to a large extent predetermined on 7 May. The election result is not where the uncertainty lies.

However, the day afterwards, when the general public no longer has any say in what happens, is still deeply uncertain. Although the parties have all let us have their manifestos, details about how they would behave in the event of a distribution of seats which seems to be largely already decided in most cases (presumably because the parties think we might vote differently if we knew) are very sketchy. Does this meet the definition of democracy, ie a system of government by the whole population? The Electoral Reform Society would say not. I would argue it does.

If the election result is largely as expected what would it tell us about the views of the electorate? I think it would tell us:

They don’t want austerity on the scale of 2010-12 again (which is one reason why the Conservatives and Liberal Democrats together don’t appear likely to get a majority);
They are not as obsessed with immigration policy as the two main parties think they are (which is why they seem prepared to vote for a range of different approaches to managing immigration with no approach commanding majority support);
They don’t want a referendum on whether to stay in the EU (which is why the Conservatives and UKIP together will not be able to get a majority); and
They don’t support the current student fees system and don’t believe it is indistinguishable from a graduate tax (which is another reason why the Liberal Democrats and Conservatives together seem unlikely to get a majority).

There are probably several other attitudes amongst the electorate that can equally well be divined in the negative in a similar way (the BBC summaries of the parties’ positions on a range of issues can be found here), but the point is that a finely balanced pattern of parties of the type we look likely to end up with does not represent an inability to make a decision. It does however represent a determination not to allow any single party to make decisions. That seems to meet a reasonable definition of democracy to me.

We know zero about 2015

10. January 2015 · Write a comment · Categories: Antifragility, Economics, Education, Prediction

There have been a lot of predictions already for 2015. The Chartered Institute for Personnel and Development predicts employment in the UK increasing by half a million, GDP growth of 2.4% and earnings growth of between 1% and 2%, ie keeping its predictions reasonably close to what happened in 2014 and/or what the OBR, OECD and IMF are predicting. The annual FT economists’ survey resulted in an average conclusion amongst 90 economists that GDP growth would increase from 2.4% pa to 2.5% pa around election time and then on to 2.6% pa soon after. I could go on but I think you get the general idea – small changes around current economic statistics with a remarkable level of agreement amongst the experts. It’s enough to make you want to use these predictions to populate your models with, which is of course the general idea.

But before you get any idea that these people know more about 2015 than you do, consider what was being said about the oil price only 6 months ago in the Office for Budget Responsibility’s Fiscal sustainability report. Here is the graph:

Once again, there was a trend of projecting a price rather similar to the current one and a remarkable level of agreement amongst the experts. Here is what has actually happened subsequently:

Now I don’t want to pick on these forecasters in particular, after all the futures prices indicated that these views were the overwhelming consensus. But the oil price is a fundamental indicator in most economic models – Gavyn Davies details how the latest fall in oil prices has changed his economic forecasts here – with implications for inflation and GDP growth, and dependent upon predictions about many other areas of the political economy of the world which impact supply (eg OPEC activity, war in oil-producing areas) and demand (eg global economic activity). So an ability to see a big move in oil prices coming would seem to be a clear prerequisite for being able to make accurate economic forecasts. It seems equally clear that that ability does not exist.

Economic forecasts generally tell us that things are not going to change very much, which is fine as long as things are not changing very much but catastrophic over the short periods when they are. Despite the sensitivity testing that goes on in the background, most economic and business decisions are taken on the basis that things are not going to change very much. This puts most business leaders in the individualist camp described here, ie a philosophical position which encourages risk taking. Indeed even if some of the people advising business leaders are in the hierarchist camp, ie believing that the world is not predictable but manageable, to anyone with little mathematical education this is indistinguishable from an individualist position.

The early shots of the election campaign have so far been dominated by the Conservative Party branding Labour’s spending plans (which to the extent they are known appear to involve quite severe fiscal tightening, although not as drastically severe as Conservative ones) as likely to cause “chaos”, while the Labour Party wants to wrap itself in the supposed respectability of OBR endorsement of their economic policies. Neither of them has a plan for another economic crisis, which concerns me.

What are desperately needed are policies which are aimed at reducing our vulnerability to the sudden movements in economic variables which we never see coming. We should stop trying to predict them because we can’t. We should stop employing our brightest and best in positions which implicitly endorse the assumption that things won’t change very much because they will.

What sort of an economy would it have to be for us not to care about the oil price? That’s what we need to start thinking about.

We still know zero

19. August 2014 · Write a comment · Categories: Economics, Prediction, Risk

From time to time I get asked about my banner header showing successive Office of Budget Responsibility (OBR) forecasts for GDP growth against actual GDP growth and, in particular, what has happened since. The OBR produces its forecasts twice a year, in March and December, and the latest one is here. However I have resisted updating my banner to date for a number of reasons:

The statement that economic forecasts are wildly inaccurate has become a truism that, in my view, no longer needs additional evidence in support; and
To be completely honest, once actual GDP growth started to increase (as was inevitable eventually, and particularly once the Government’s austerity boot’s grip on the economy’s neck started to weaken), the graph no longer looked quite as amusing.

However, I have recently started to question the first of these assumptions so here is an updated graph:

Notice how the point at which growth peaks and starts to fall is moving closer with each new forecast. This is as much a part of their models as putting back the upward path a quarter or two with each successive forecast was while that path was still actually falling. Be assured that the OBR will not forecast the next fall before it actually happens.

What concerns me is the forecast consensus which is starting to build around 2014-2018 of GDP growth between 2% and 3% pa (currently narrowing as a forecast to 2.5% – 2.8% pa). This is despite the OBR themselves making no more than a claim of 20% probability of growth staying in this range, as the following fan chart shows:

However I don’t see this fan chart turning up in many news reports and therefore my concern is of an election campaign fought under the illusion of a relatively benign economic future. I think it is likely to be anything but, particularly as the Government is likely to stick the boot back in post election whoever wins.

There seems to be no chance of stopping the OBR and others publishing their forecasts, too many people seem to value the power of the story-telling however implausible the plot, so the only course available seems to be to rubbish them as often as we can. That way it may just be possible, despite all the noise about predictions of economic recoveries and collapses we cannot possibly foretell being used to try and claim our political support more generally, to keep in mind that we know zero. And make better decisions as a result.

Public sector pensions and liabilities

30. April 2014 · Write a comment · Categories: Actuarial, Demographics, Economics, Pensions, Prediction, Regulation

Sometimes the best explanations of things come when we are trying to explain them to outsiders, people not expected to understand our particular forest of acronyms, slangs and conventions which, while allowing speedier communication, can also channel thinking down the same tired old tracks time after time. Such an example I think is the UK Government Actuary’s Department (GAD) paper on Pensions for Public Service Employees in the UK, presented to the International Congress of Actuaries last month in Washington.

Not a lay audience admittedly, but one sufficiently removed from the UK for the paper’s writers to need to represent the bewildering complexity of UK public sector pension provision very clearly and concisely. The result is the best summary of the current position and the planned reforms that I have seen so far, and I would strongly recommend it to anyone interested in public sector pensions.

There are two points which struck me particularly about the summary of the reforms, designed to bring expenditure on public service pensions down from 2.1% of GDP in 2011-12 to 1.3% by 2061-62.

The first came while looking at the excellent summary of the factors contributing to the decline of private sector pension provision. Leaving aside the more general points about costs and risks, and those thought applicable to the (mainly) unfunded public service schemes which have been largely addressed by the planned reforms, I noticed two of the factors thought specific to funded defined benefits (DB) plans:

A more onerous burden on trustees of plans, including member representation, and knowledge and understanding; and
Company pension accounting rules requiring liabilities to be measured based on corporate bond yields.

As the GAD paper makes clear, the Public Service Pensions Act will result in a significant increase in interventions on governance in particular in some public sector schemes. The Pensions Regulator’s recent consultation on regulating public service pension schemes is also proposing a 60 page code of practice be adopted in respect of the governance and administration of these schemes. This looks like the “onerous burden” which has been visited on the private sector over the last 20 years all over again.

The other point is not directly comparable, as company pension accounting rules do not apply to the public sector. However, as pointed out by the Office for National Statistics (ONS) this week, supplementary tables to the National Accounts calculating public sector pensions liabilities will be required of all EU member states from September this year onwards, to comply with the European System of Accounts (ESA) 2010. These are carried out using best estimate assumptions (ie without margins for prudence) and a discount rate based on a long term estimate of GDP growth (as compared to the AA corporate bond yield required by accounting rules).

The ONS released the first such tables published by any EU member state, for 2010, in March 2012. This for the first time values the liabilities in respect of unfunded public sector pension entitlements, at £852 billion, down from £915 billion at the start of the year.

I think there is a real possibility that publication of this information, as it has for DB pension schemes, will result in pressure to reduce these liabilities where possible. An example would be one I mentioned in a previous post, where mass transfers to defined contribution (DC) arrangements from public sector schemes following the 2014 Budget have effectively been ruled out because of their potential impact on public finances. If such transfers reduced the liability figure under ESA 2010 (which they almost certainly would) the Government attitude to such transfers might be different in the future.

The second point concerned the ESA 2010 assumptions themselves. There was a previous consultation on the best discount rate used for these valuations, ie the percentage by which a payment required in one year’s time is more affordable than one required now, with GDP growth coming out as the preferred option. Leaving aside the many criticisms of GDP as an economic measure, one option which was not considered apparently was the growth in current Government receipts, although this would seem in many ways to be a better guide to the element of economic growth relevant to the affordability of public sector provision. Taking the Office for Budget Responsibility (OBR) forecasts from 2013-14 to 2018-19 with the fixed ESA 2010 assumptions for discount rate and inflation of 5% pa and 2% pa respectively gives us an interesting comparison.

The CPI assumption appears to be fairly much in line with forecasts, but the average nominal GDP and current receipt year on year increase over the next 6 years of forecasts are 4.47% pa and 4.61% pa (4.72% pa if National Accounts taxes are used rather than all current receipts) respectively. A 0.5% reduction in the discount rate to 4.5% pa would be expected to increase the liability by over 10%.

Another, possibly purer, measure of economic growth, removing as it does the distortions caused by net migration, would be the growth of GDP per capita. If we take the OBR forecasts for real GDP growth per capita and set it against the long term ESA 2010 assumption of 1.05/1.02 – 1 = 2.94% the comparison is even more interesting:

In this case the ESA assumption is around 1% pa greater than the forecasts would suggest, making the liability less than 80% of where it would be using the average forecast value.

The ESA 2010 assumptions are intended to be fixed so that figures for different years can easily be compared. It would clearly be easy to argue for tougher assumptions from the OBR forecasts (although the accuracy of these has of course not got a great track record), but perhaps more difficult to find an argument for relaxing them further.

Whether the consensus holds over keeping them fixed when and if the liability figures start to get more prominence and a lower liability becomes an important economic target for some of the larger EU member states remains to be seen. However if the assumptions cannot be changed, since public sector benefits now have a 25 year guarantee in the UK (other than the normal pension age now equal to the state pension age being subject to review every 5 years), then the cost cap mechanism (ie higher member contributions) becomes the only available safety valve. So we can perhaps expect nurses’ and teachers’ pension contributions to become the battleground when public sector pension affordability becomes a hot political issue once more.

We can poke fun at the Government’s enthusiasm to take on the Royal Mail Pension Plan and its focus on annual cashflows which made it look beneficial for their finances over the short term, but we may also look back wistfully to the days before public sector pensions stopped being viewed as a necessary expense of delivering services and became instead a liability to be minimised.

Where would you rather be working in your later years: UK or Germany?

08. April 2014 · Write a comment · Categories: Demographics, Economics, Pensions, Prediction, Regulation

As a quick illustration of the differences between how businesses in the UK and Germany approach change this chart from the recent Economist Intelligence Unit research carried out for Towers Watson takes some beating. To UK eyes, an insane proportion (45%) of German businesses are proposing to make physical changes to their workplaces by 2020 to accommodate a greying workforce. There is an even more dramatic contrast when the issue of flexible working hours is raised. Less than half of UK businesses intend to offer more flexible working hours by 2020, compared to over three quarters of German businesses.

Neither are we interested in training our older workers apparently. Only 28% of UK businesses intend to ensure that the skills of their older employees remain up to date, compared to 48% of German businesses.

So where are UK businesses preparing to manage change then? Giving employees more choice over their benefits is cited by 60% of UK businesses, compared to 45% in Germany and the European average of 48%.

But is this the positive step it is presented as? It seems unlikely to me that these UK businesses that don’t want to invest in older workers’ working environments or give them flexibility over hours or location or train them is interested in providing any choice over benefits that doesn’t also cut their costs. There are going to be some battles ahead over exactly how the pensions changes in the Budget are to be implemented. Judging from this survey, they are going to be hard fought.

The difficulties of looking forward

25. January 2014 · Write a comment · Categories: Economics, Prediction, Regulation

We are only six months into the Bank of England’s new regime of giving forward guidance about what circumstances might lead them to adjust the Base Rate and they are already in a bit of a mess with it. Whether forward guidance is abandoned or not is still in the balance, amid much confusion. However, much of this confusion seems to be due to the challenge that events have provided to the assumption that the Bank of England could make reasonably accurate economic predictions.

It turns out that not only did the Bank not know how fast unemployment would fall (not a surprise: the Monetary Policy Committee (MPC) minutes from August make clear that they suspected this might be the case), but neither did they know, when it did fall, what a 7% unemployed economy would look like. The Bank has been very surprised by how fragile it still is.

Back in August 2013, when unemployment was still at 7.7%, the MPC voted to embrace the forward guidance which has now fallen on its face. This said that: In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%, subject to the conditions below.

The “conditions below” were that all bets would be off if any of three “knockouts” were breached:

1. that it would be more likely than not that CPI 18 to 24 months ahead would be at 2.5% or above (in fact it has just fallen to 2%);

2. medium-term inflation expectations no longer remained “sufficiently well anchored” (the gently sloping graph below would suggest it hasn’t slipped that anchor yet); or

3. the Financial Policy Committee (FPC) judged monetary policy posed “a significant threat to financial stability”. More difficult to give an opinion on that one but, looking beyond the incipient housing market bubble, it is difficult to see that monetary policy is causing any other instability currently. Certainly not compared to the instability which would be caused by jacking up interest rates and sending mortgage defaults through the roof.

Source: Bank of England implied spot inflation curve

So it seems that there has been no clear knock out on any of these three counts, but that the “threshold” (it was never a target after all) of 7% is no longer seen as significant a sign of economic recovery as it had been believed it would only last August.

Fun as it is to watch the illusion of mastery of the economy by the very serious people flounder yet again, as what is an intrinsically good piece of economic news is turned into a fiasco of indecision, I think the Bank is right to believe that it is far too early to raise interest rates. I say so because of two further graphs from the Office of National Statistics (ONS) latest labour market statistics, which were not included in their infographic on the left.

The first is the graph of regional unemployment, which shows very clearly that large areas of the UK are still nowhere near the magic 7% threshold: the variations are so wide and, in austerian times, the resources to address them are so limited that it makes sense not to be overly dazzled by the overall UK number.

The second is the graph of those not looking or not available for work in the 16-64 age group since the 1970s. As you can see, it has recently shown a very different pattern to that of the unemployment graph. In the past (and borne out by the data from 1973 to around 1993) the number not available to work has tended to mirror the unemployment rate as people who could manage without work withdrew from the job market when times got tough and came back in when things picked up. However in the early 90s something new started to happen: people withdrawing from the job market even when unemployment was falling. There has been a steady increase in their number until it finally started to fall only last year. So what is happening?

One of the factors has been a big increase in the number of people registered as self employed, rising from 4.2 million in 1999 to 5.1 million in 2011. However, many of these people are earning very little and I suspect that at least some of them would have been categorised as unemployed in previous decades. There must therefore be some doubt about whether 7% unemployed means what it used to mean.

The Bank of England have shown with their difficulties over forward guidance that it is very hard to look forward with any degree of precision. It should be applauded for admitting that it doesn’t know enough at the moment to start pushing up interest rates.

£1,000 a year rise? Probably not

07. January 2014 · Write a comment · Categories: Economics, Pensions, Prediction, Regulation

There has been the usual flurry of misleading headlines around the Prime Minister’s pledge to maintain the so-called triple lock in place for the 2015-20 Parliament. The Daily Mail described it as a “bumper £1,000 a year rise”. Section 150A of the Social Security Administration Act 1992, as amended in 2010, already requires the Secretary of State to uprate the amount of the Basic State Pension (and the Standard Minimum Guarantee in Pension Credit) at least in line with the increase in the general level of earnings every year, so the “bumper” rise would only be as a result of earnings growth continuing to grind along at its current negative real rate.

However, the Office for Budget Responsibility (OBR) is currently predicting the various elements of the triple lock to develop up until 2018 as follows:

The OBR have of course not got a great track record on predicting such things, but all the same I was curious about where the Daily Mail’s number could have come from.

The Pensions Policy Institute’s (PPI’s) report on the impact of abandoning the triple lock in favour of just a link to earnings growth estimates the difference in pension in today’s money could be £20 per week, which might be the source of the Daily Mail figure, but not until 2065! I think if we maintain a consistent State Pensions policy for over 50 years into the future a rise of £20 per week in its level will be the least remarkable thing about it.

The PPI’s assumption is that the triple lock, as opposed to what is statutorily required, would make a difference to the State Pension increase of 0.26% a year on average. It is a measure of how small our politics has become that this should be headline news for several days.

Carry on Clio

04. January 2014 · Write a comment · Categories: Actuarial, Demographics, Economics, Health, Prediction

It’s a relatively new science, and one which binds together many different academic disciplines: mathematical modelling, economics, sociology and history. In economic terms, it is to what economists in financial institutions spend most of their time focusing on – the short to medium term – as climate science is to weather forecasting. Cliodynamics (from Clio, the Ancient Greek muse or goddess of history (or, sometimes, lyre playing) and dynamics, the study of processes of change with time) looks at the functioning and dynamics of historical societies, ie societies for which the historical data exists to allow analysis. And that includes our own.

Peter Turchin, professor of ecology and mathematics at the University of Connecticut and Editor-in-Chief of Cliodynamics: The Journal of Theoretical and Mathematical History, wrote a book with Sergey Nefedev in 2009 called Secular Cycles. In it they took the ratio of the net wealth of the median US household to the largest fortune in the US (the Phillips Curve) to get a rough estimate of wealth inequality in the US from 1800 to the present. The graph of this analysis shows that the level of inequality in the US measured in this way peaked in World War 1 before falling steadily until 1980 when Reagan became US President, after which it has been rising equally steadily. By 2000,inequality was at levels last seen in the mid 50s, and it has continued to increase markedly since then.

The other side of Turchin’s and Nefedev’s analysis combines four measures of wellbeing: economic (the fraction of economic growth that is paid to workers as wages), health (life expectancy and the average height of native-born population) and social optimism (average age of first marriage). This seems to me to be a slightly flaky way of measuring this, particularly if using this measure to draw conclusions about recent history: the link between average heights in the US and other health indicators are not fully understood, and there are a lot of possible explanations for later marriages (eg greater economic opportunities for women) which would not support it as a measure of reduced optimism. However, it does give a curve which looks remarkably like a mirror image of the Phillips Curve.

The Office of National Statistics (ONS) are currently developing their own measure of national well-being for the UK, which has dropped both height and late marriage as indicators, but unfortunately has expanded to cover 40 indicators organised into 10 areas. The interactive graphic is embedded below.

Graphic by Office for National Statistics (ONS)

I don’t think many would argue with many of these constituents except that any model should only be as complicated as it needs to be. The weightings will be very important.

Putting all of this together, Turchin argues that societies can only tolerate a certain level of inequality before they start finding more cooperative ways of governing and cites examples from the end of the Roman civil wars (first century BC) onwards. He believes the current patterns in the US point towards such a turning point around 2020, with extreme social upheaval a strong possibility.

I am unconvinced that time is that short based solely on societal inequality: in my view further aggravating factors will be required, which resource depletion in several key areas may provide later in the century. But Turchin’s analysis of 20th century change in the US is certainly coherent, with many connections I had not made before. What is clear is that social change can happen very quickly at times and an economic-political system that cannot adapt equally quickly is likely to end up in trouble.

And in the UK? Inequality is certainly increasing, by pretty much any measure. And, as Richard Murphy points out, our tax system appears to encourage this more than is often realised. Cliodynamics seems to me to be an important area for further research in the UK.

And a perfect one for actuaries to get involved in.

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