Thursday, April 16, 2015
The pressure is on.
Here is a fact. Funding retirement remains one of the biggest economic and social challenges facing the world in the 21st century.
The growing financial pressures on retirement systems around the world are forcing individuals and families, employers, and policymakers to change the way they think about and plan for retirement. Retirement as a concept is being rapidly redefined.
We can also expect to see people work beyond current retirement ages as the notion of retirement becomes more flexible, blending leisure with periods of employment.
While the onus is on the individual to plan, there remains a vital and essential role for governments and employers. Not only will they continue to provide significant financial support, through government retirement benefits and workplace pensions, but they will also come to provide a wide array of services to people who need to build the important life skills required to save for, and transition into, retirement
Government spending on old age pensions already takes up more than 10% of GDP in a number of our survey countries including France, Germany and Poland, and this figure continues to grow.
As a result, the old models of paying for retirement, based on generous government retirement benefits and occupational defined benefit pensions, must eventually give way to something more sustainable. Individuals will need to play a greater role in planning for and funding their own retirement.
The long-term solution lies in individuals saving more, possibly in governments increasing taxes to fund government retirement benefits and – certainly – in society as a whole taking a more flexible view of work in later life.
It is clear that people are still not doing enough to prepare for retirement. In our fast-paced modern world, planning for an event that will not occur for maybe three or four decades seems to go against the grain.
For many faced with the demands and distractions of everyday life, the challenge to think, plan and act for the long term appears to be simply too great.
However, that is exactly what retirement planning requires of us. Though all countries in our survey are faced with a similar challenge, not all countries are following the same blueprint or achieving the same outcomes.
For example, in 2012, the Netherlands had one of the best-funded pension systems in the world with pension fund assets equal to 160% of its GDP, up from 103% in 2001. Meanwhile, in Hungary, the value of pension assets relative to GDP fell from a peak of 15% in 2010 to 3% in 2012, following a government decision to close the country’s mandatory private pension system.
To tackle the challenges, which lie ahead, all governments and employers need to work with employees to provide simple and secure channels to save and invest for the long-term, remove the obstacles to save, improve access to advice and guidance, and make retirement itself a more flexible process, which puts people in control of their own finances.
Employees in the US and Canada overall have the most positive outlook on retirement, possibly reflecting the additional security provided by access to personal pensions. Americans, for example, have amassed some $19.4 trillion in personal pension assets with three-fifths (60%) of the workforce enjoying access to a personal retirement plan (in most cases, a defined contribution plan10).
A similar picture emerges in Canada, where $2.4 trillion has been amassed in pension assets, second only to the US Less optimistic nations include Poland, Hungary, and Japan. People here were more likely to mention negative words when describing their future retirement. In each of these countries, there are concerns around the sustainability or adequacy of the retirement system.
The problem of pension reform is complicated because different countries have different attitudes towards the idea of reform. The following is from a 2014 survey of 16,000 people in 16 countries.
· One- third of Canadians would chose a balanced approach to reform consisting of reductions in government retirement benefits and tax increases
· 30% of US employees believe that retirement age should increase in line with life expectancy
· 56% of Germans believe that people already work long enough and don’t favor any increase in retirement age
· 34% of British respondents think the government should reduce the value of benefits and increase taxes
· 25% of French people think that those in dangerous jobs and manual workers should not be expected to retire later