No Certainty In What You Get

The money that goes into the individual accounts year by year will lose value as inflation continues. No one knows whether the interest earned by the Fund will be big enough to combat the loss in money value. Nobody knows when large doses of inflation will occur, but if they arrive just before a person retires, then the value of his individual account will be much less than it might have been. His pension will depend on what has been put in over his whole working life, and not on the value of money when he retires.

Another important fact overlooked by Doug Wilson is that there will be a deduction when a person retires, to provide for inflation after retirement. This will be assessed according to how much inflation is expected over the years a person can expect to live. The idea is that he should not draw out of the fund anything more than he has in his account. That is the fundamental principle of this scheme — the individual account. Take the following hypothetical case:— "A" has in his account an amount which is equivalent to $10,000 when he retires at age 65. Suppose inflation is 5% a year, or is expected to be that. Suppose too he is expected to be alive for 10 years after he retires, on the average life expectancy. If you pay him $1000 per year (which would use up his $10,000) it would not account for inflation of 5%. If you give him an extra 5% per year on $1000, he will draw $12,556 — i.e more than he has in his account.

To keep him within the money in his account the scheme proposes that he have a lower pension, so that he will get less to begin with. He would thus start off on about $790 per year, in order to pay for the rises he will probably have to get to counter inflation.

This is a severe reduction, and one that can only underline the uncertain future for a contributor to the fund. If inflation is more than 5% (as in recent years) the deduction would have to be larger than in the example above.