# Tag: final salary

I am about to depress you.  So grab a cup of coffee, or your favorite beverage, and put your feet up.  And put your arithmetic head on.  I am about to turn numbers upside down and talking some shocking truths about how hard you have worked for that cup of coffee and how much you have to be paid to earn a lifestyle of luxury.

Or to be mischeivious, how much we have been paying some very well paid people for having lunch and going to sleep.

Thought Experiment 1: You are worth \$1 or GBP1 or Euro1 per second. Count 1 potato, 2 potato, 3 potato. Click, click, click.  Count it out like a metronome. Click, click, click.

Each click is a dollar coming in.  Not a lot, is it?   Barely pays for the coffee you are drinking, the sofa you are sitting on, your broadband connection.

Actually, it is is \$30 million a year.

I put it on a graph for you. You might want to check my arithmetic again. I’ve done the calculation several times but I am getting old and I’ve begun to make mistakes with numbers.

Thought Experiment 2: Over the shock? Well, lets count 30 seconds. 30 potatoes – wow, that takes a long time.

Wait – patiently. \$1 arrives.

Count another 30 seconds, another \$1 arrives.   \$2 dollars per minute.

Coffee is beginning to seem really expensive.

How much is that? \$15 million, of course.

No, \$1 million a year.

You have to divide by 30 not 2. You are now earning 1/30 of the person earning \$1 every second or \$30m a year.  Shock?  That long wait is \$1m a year.

And look again.  The person earning \$1 per minute, every 60 potatoes, is earning half what you are earning (500K).

Thought Experiment 3: Now imagine earning \$1 every 15 minutes.  I am not going to ask you to count to 900 potatoes.  It will feel an age.  Certainly long enough to linger over your coffee and check your mail.  \$1 by the time you have finished.  That’s all.

That 35K a year.  A respectable salary in England.

Thought Experiment 4:  And now imagine \$1 per hour.  What do you do with \$1?  Buy a packet of crisps?  That’s less than 9K a year.

Thought Experiment 5: And finally let’s look at the minimum wage.  75c an hour.  Around \$6500 a year.  Green line at the top. Less than a litre of milk.  Half a loaf of bread.

Still it is better than \$1 day which is the green line second from the bottom.

The red line underneath that is \$1 per month.

Seeing the other picture?

You are probably feeling a little muddled.  Good.  It’s good to turn numbers upside-down and inside-out and get another perspective.  So what have I done, here?

• I’ve reminded you that employers quote wages by the hour because accountants use that number to do their costing.  This number doesn’t concern you.  What concerns you is the total per year (after taxes) and either the amount per second or the time it takes you to earn \$1 – which is what I’ve shown you.  That’s the lifestyle you’ve earnedTotal after taxes divided by (365 days x 24 hours x 60 minutes x 60 seconds)At a dollar per second that comes to over 30m a year.
• I’ve shown you how the gap between pay rates gets very big, very fast.   The way pay rates are quoted encourages us to make mistakes.  \$1 per 30 seconds and we think half-a-minute and think we have half-the-lifestyle, when actually, we have 1/60 the lifestyle, or 1/60 the lifestyle, or 1/360 the lifestyle.

You should be concentrating on the lifestyle you earn.

Ask: What do I earn per second because I am alive every second of the day not just the time I spend making money for other people.

Every second of the day.

Now tell me what you earn per second and how you intend to drive that up!

P.S.  If you want to play with the numbers or the graph, it is on Chartle.

## How’s your pension scheme?  Do you even know?

I just read a post about the closing of “defined benefit” pension schemes that we hear about in the news, and the rather old news that public pensions are not funded – meaning – we are expecting today’s children to grow into adults and pay us out of their NI contributions – to put it starkly.

## Do you understand how your pension works?

I started writing a tutorial on pensions and what you should know about your own fund. In my experience, people pay 6% of their own money in and their employer pays as much, if not more.

But few people, including white collar professionals have any idea where the money goes, or whether they will ever get it back.

I’ve deleted the tutorial, though, because I felt as if I was spreading alarm & despondency and though I know more than most people, I am not an actuary.  So I’ll make this deal.

If you want to contact me, I’ll walk you through the questions you should be asking.

Grab your pension handbook, scan the contents, and I’ll walk your through the sections you should be looking for.  You can read the whole thing when you understand the framework.

What I wanted to say on the post but got blocked by blogspot’s sign in (give us the option of typing in our blog name would you – open id often crashes), is that we should get over our personal screaming heeby-jeebies and start structuring the debate about pensions as a wider issue.

### 1 How many people have benefited from pensions?

It is great to think that a pension will give us a fabulous old age, and some people are living royally, but how many people have benefited?  In UK and world wide?

### 2 What are commitments to the aged?

What are we deeply committed to doing for older people?  And how widespread is that agreement?  Are we honoring that commitment?

For a start, why do we assume that we should stop work at 65?  It was notworthy that in The Economist debate this week, 80% of people voted to raise or abolish the retirement age.

### 3 What political commitments do we need to honor these commitments?

Most people don’t understand that public pensions are unfunded.  For the most part, the NI contributions of today pay for the pensions for tomorrow.

Has the younger generation, whom we outnumber, agreed to pay us?  Are we increasing the likelihood that they will want to and/or will the economic ability to deliver?

### 4 What makes us think we can think predict the economy 40-80 years ahead?

When we pay into a pension fund we are agreeing to something that will happen in 40, 50, 60, 70 years ahead.  Can we predict that far?

Perhaps we need another way of thinking about funding old age?

### 5 What happened to the money we have paid into our pension funds?

In crude terms, it has gone to people who have already retired and a lot has been lost in the credit crunch.

What interests me though, is where our pension funds were/are invested.  When I put in 6% of my salary and my employer puts in another 8% say, I am actually paying a ‘tax’ of 14%.

The money goes into a fund and, because of its size, becomes capital. It is available to companies as capital to grow and expand.

And it is available to governments to borrow (gilts) to fund roads, schools, etc.  They promise to pay it back out of future taxes – hopefully from an economy that is bigger and healthier, but of course, may not be.

And best of all, the government borrows from its citizens rather than from sovereign funds in other countries (government surpluses in other countries.)

### What interests me is where do my pension funds go?

Who is using them to invest?  Who was investing banks involved in derivatives, etc?

If you were an employer, would you offer a pension fund.  I am not sure I would.  I would invest in employees’ education.  My greatest concern would that they are very flexible with multiple skills and multiple languages followed by the ability to run their own businesses. That’s the most ethical solution that I can think of.

But if there were no pension funds, who will supply investment capital?  Who does have access to large dollops of money that we call capital?

Right locals -fill me in.  Tell me how it works here!