Further to my post Very long term interest rates I've been giving the subject some more thought, not for the sake of time travellers but as a possible means by which a pension fund might be created.
Now just imagine that if when a person is born, a long-term saver account were set up that could not have a withdrawal for 65 years. Imagine that £1000 were deposited in it. How much would there be for the person when they retire?
If we take the 5% interest rate then we get £23,839.90. Hmm... it's not really that high an amount for several years is it? What about 8%? £148,779.85. How about 10%? Admittedly it's a high rate but we are talking about extremely low liquidity. We get £490,370.73 - now this is more like it. But we have the curse of inflation still.
What about an alternative model of keeping the rate at 5% but adding £100 to the account each year? We get £69,519.70. On 8% we get £333,504.65. 10% produces £979,741.45 (but once again waiting just one extra year brings the ~illionaire status).
And if we take a 5% interest rate but tie the additional deposit to rise at an inflation rate of 2%? We get £92,578.98. On an 8% rate we get £395,547.30.
So is there anything in this model that could be a workable solution for pensions? The biggest problems are still relying on the interest rate being high enough (even if it's the average of a variable rate) - and on the adding model it really needs to at least 7% for the resulting amount to be even vaguely reasonable at today's prices - and inflation. If we follow historians of the 1930s who use multiplying by 30 as their method of giving very rough modern day equivalents, then on an 8% rate with a yearly additional £100 inflated by 2% per annum we find a 65 year fund yields the rather low equivalent lump sum of £13,184.91.
(For those still thinking about the Monk's 200 year plan from the last post, we might try a 100* method. On an 8% rate with no additions he'd get the equivalent of £48,389,495.85.)
A 12.5% rate seems somewhat high, even so for such a non-liquid account, but would yield the equivalent of £138,741.61. If you could then maintain that interest rate for a simple interest payout, you'd then get an annual pension equivalent to £17,342.70. But there's a huge amount of "if"s in there and viability can't be ensured. This doesn't seem like a long-term solution to pensions.