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Today's quote:

Friday, March 16, 2018

PV = P * [(1 - (1 + r)^-n) / r]

Click on table to enlarge

 

Every time I hear some of those well-to-do age pensioners thump the table and yell out, "It's my money; I paid my taxes!", I feel like saying, "PV = P * [(1 - (1 + r)^-n) / r]" and show them this table of the present value of an annuity.

So you're looking forward to a long and healthy retirement of twenty years during which time you expect to be paid an annual pension of around $23,598 ? How much would it cost you to buy such an annuity?

This online calculator will do the calculation for you: enter $23,598, an assumed discount rate of (say) 4%, and 20 for the number of payments, and you'd have to splash out $320,704.52 to secure such a single's pension (or $483,448.68 for a combined couple's pension of $35,573).

How much income tax did you pay over the course of your working life? Now reduce that total by a rather large percentage which went towards paying for all the things you rightly expect governments to provide you with. Here's a hint: lots of infrastructure, defence and police force, fire brigade, hospitals, schools ... I think you get the idea. So how much is left of all your taxes to "buy your pension", bearing in mind an annuity is fixed, whereas your free age pension is generously indexed to the CPI?

I'm absolutely convinced that the shortfall is far greater than your indig-nation that this is not really your money but rather welfare, paid for in part by today's hardworking taxpayers, with an ever-greater part passed on as an ever-mounting debt to generations not yet born.

You see, the age pension was legislated a hundred and ten years ago during the Deakin administration and was unusual compared with other countries in that it was non-contributory (paid out of general revenue, rather than social insurance contributions). Retirement was set at 65 at a time when the average life expectancy was 55.2 years for males and 58.8 for females; today it is 80.4 and 84.6 respectively - see here. (I've my own theory on why women live longer but don't get me started ☺)

The system is bankrupt and you may be the last generation to be so generously rewarded in old age. To realise that, you don't have to be Einstein, just grateful!


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