Long Term, Your Government Will Leave You In The Lurch
They Have Little Choice…
It is probably fair to say that we are all suffering from crisis fatigue. Whilst European troubles continue to dominate the headlines, there are others out there that in some ways are an offshoot of the current debacle, but that also are crises that have been in the making for years. Specifically I refer here to the long fuse problems surrounding the pensions systems of the developed world. This aspect of developed world economics has long been on track for a troubled ending, made much worse and therefore made more immediate by the mire that public sector finances are in right now and the growing question marks over the ability of recession hit economies to see improvements driven through the private sector.
The developed world is facing a long-fuse time bomb with regard to it’s pension provisions.
That problems exist, and have been building up over the years is not new news, but the scale of the problems is rarely discussed in open forums, by the media, and in investment circles. Perhaps with the exception of the board rooms of the major pension funds around the world. Politicians are not likely to blow their political capital on an issue that will frankly be someone else’s problem 10 – 15 years down the track, well after he/she is voted out of office. The problems in pension systems around the world can be distilled into three central issues:
Now is as good a time as any for individuals to take stock of personal retirement income provisions. You may not like what you discover!
Anyone looking closely at their own national retirement system would probably have to conclude negatively on these core questions – at least for some of the criteria. The situation has been growing worse for years in most developed world economies, and has taken a serious jolt to the downside in the current financial and economic turmoil. It is for these reasons that we should all be encouraged to take stock of our own individual retirement income situation and take avoiding action. For most people, wealthy and less wealthy alike, a close inspection of circumstances may produce some worrying conclusions.
Public Sector Provision Dominates Income Support Mechanisms for Most in Retirement.
In the developed world public sector provided pensions are absolutely central to old age income support. (When we refer to the broad universe of countries in this document we refer to the OECD countries and a few additional ones that have been included in the data – unless we name the individual countries specifically). Public sector provision accounts for some 60% of old age incomes on average. The remaining 40% is about equally made up of private pensions and other savings. I must admit to being a little surprised by this very basic statistic – that the public sector makes up such a huge part of our future retirement income is a very sobering thought right now. I would have thought that, given the proliferation of pension funds and mandatory pension schemes that have sprung up over the past 20 years or so, the role of private provision might have risen to a much greater proportion of future retirement income. The role of the public sector is huge, and one would have to conclude, in the current environment, is both unaffordable and unsustainable for a great many countries in the developed world.
In the developed world, Public sector provision accounts for approximately 60% of retirement incomes on average.
Private Provision Must Grow.
The role of private sector provision must grow. But the current turmoil in economies and financial markets has probably shaken confidence in the ability of privately run pension plans to make investments that are going to provide adequate returns to underpin sufficient future income.
At the core of the issue are four simple factors that underscore the problems for retirement and old age incomes:
- Accepted and mandated retirement ages.
- Demographic changes that will see a growing ratio of older people in the overall population mix.
- People are living longer and longer, a trend that is likely to continue.
- The ability of governments to fund these future claims, bad enough before, but much more questionable now.
Political realities are constraining governments from adequately confronting future pension liabilities head on. As the current debt crisis has so aptly demonstrated ‘kicking the can down the road’ is the preferred route for dealing with an electorate who don’t want to be told that their retirement ages need to increase and that public pensions have to be reduced.
It is tempting perhaps for the untutored observer to believe that governments are doing nothing about this ticking time bomb. That would be untrue. Many countries are in fact well aware of these conditions and are endeavouring to affect changes. However, politics often rears its head in preventing change or at least watering it down. Witness huge popular resistance to simple attempts to raise the retirement age in Europe. Imagine the noise when governments embark on policies to water down benefits themselves. Political suicide in a world where the average age of voters is rising, voters are at or getting closer to that retirement age.
It is only as recently as 1997 that the OECD declines in pensionable ages reversed and started to trend back upwards.
Picking up the Pension Cheque Has Come at an Earlier Age Over Recent Decades……
Within the developed world the average age for eligibility of pensions is 62.9 for men and 62 for women, but the average disguises some quite wide ranges. In Greece, for example, one is able to claim a public pension after 37 years in the workforce. Using age 20 years as a base, this means the average Greek citizen can start claiming a public pension at 57. For Germany, the working life is 45 years, implying picking up that pension cheque on the 65th birthday. The equivalent for Norway and Iceland, the oldest pensionable ages are 67 years and for the US 66 years.
Fig. 1 groups OECD countries into categories of historical average pensionable ages, as well as projections going forwards. The overall trend for the OECD as a whole for the past 60+ years has been one of earlier pensionable ages.
The average pensionable age in 1949 was higher than it currently stands, despite the consistent increase in life expectancy.
....And This at a Time Of Rising Life Expectancy.
Since the end of World War II there has been a general trend of reducing the pensionable age – at a time of lengthening life expectancy, thereby implying longer periods of life whilst drawing pensions. In 1949 the average pensionable age was 64.3 years, versus 62.9 today. It may not sound like much, but when one factors in the increasing numbers of people eaching that age, and the fact that they are likely to be in the pension system for a lot longer than was the case back then, the economic and financial implications are substantial...