The future of Retirement programs

Yale Global Online has done some interesting research into retirement programs around the world and it draws some interesting and some would say disheartening conclusions.

Government-sponsored pensionable retirement programs are universally popular, and in the wealthiest economies are seen as a right of the worker. Retirement programs around the world are similar in purpose, yet differ considerably in scope, coverage, contributions, requirements, taxes, eligibility and benefits. Official retirement can range from 50 to 70 years, however, most are concentrated between 60 and 65 years. 

Longer lifespans mean that people spend more time living in retirement. This, in turn, puts increasing pressure and costs for governments, employers and individual retirees. Governments around the world have come up with a number of solutions which include, hiking retirement ages, reducing retirement benefits, increasing taxes, shifting from defined-benefit to defined-contribution plans, and promoting incentives among workers to save more and work longer. 

Around the world, there are many protests that form quickly when governments move to cut retirement benefits, and many workers worry that a comfortable retirement is not in their future.

So governments do not move fast when changing pensions, they move slowly. Governments have reduced pension retirement benefits by switching to less favourable indexation. The United States, for example, changed inflation measures for US social security payments in 2000 to cost-of-living allowances based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, reducing the buying power of the monthly benefits. In Canada, the government uses the Canadian Consumer Price Index rather than the more inclusive Federal Government’s Survey of Household Spending (SHS)even though SHS would be a better benchmark for adjusting CPP annually.

Another way that governments attack pensions is to increase taxes or redirect taxes from other government programs, this is the least popular approach. Politicians are short-term thinkers, they focus on the next election and will tend to postpone addressing costly long-term problems, such as retirement obligations. In economic terms, many of us have a short time horizon and politicians take advantage of this fact and rely on younger taxpayers who are reluctant to pay additional taxes for a far-off retirement that they may never receive to support their initiatives. 

Private-sector retirement plans have also changed markedly, in turn influencing public-sector practices. Defined benefit pension plans have declined in many countries. In the United States, for example, the proportion of private-sector workers with a defined-benefit pension declined from close to 90 percent in 1975 to around 30 percent today. 

Surveys of multinational corporations report that defined-benefit pensions are considered outdated. Less costly, less risky defined-contribution pension arrangements are the preferred alternative for companies. This is because the risk is not on the company but on the individual. Other factors that are having an influence on retirement programs are:

Inequality: Life expectancy can vary by years within one country among racial and ethnic groups, as is the case for whites, blacks and Hispanics in the United States (Source: US Center for Disease Control).

Long lifespans, insufficient personal savings and risky old-age pensions require many elderly to work past the age they had expected to retire. In Japan, New Zealand and South Korea, for example, a third or more of the men aged 65 years and older remain in the labour force.

Yale Global sums up their report by stating that inescapable demographic trends and financial realities coupled with the troubling state of government affairs pose significant consequences for retirement programs. Some of these are

·       Higher retirement age:  With the goal of reining in rising costs, official retirement ages, including early retirement ages, are gradually being raised. Many governments want men and women to delay retirement until their late 60s or older.

·       More taxes for retirement pensions: With population aging, increased longevity and fewer workers per retiree, many governments must increase taxes or redirect tax monies from other programs to pay for rising retirement costs.

·       Transition to defined-contribution pensions: Private- and public-sector employers are moving from traditional defined-benefit pension arrangements to defined-contribution pension plans, thereby shifting financial risks from employers to workers.

·       Insufficient savings: Despite repeated warnings, most older workers have not saved enough for retirement. The challenge grows with increasing longevity. In addition, most workers lack the financial skills to make informed decisions about investing limited savings for sustainable retirement income.

·       Reduced retirement benefits: Benefits are likely to be reduced by adjusting inflation indexes, income thresholds, work requirements, means testing, surtaxes or eligibility.

·       Working longer: Working longer is the likely future for many men and women, especially those with limited savings. Many workers will find themselves working well past the age they had expected to retire, some to stave off poverty.

The reality is that there will be many more changes for retirement programs, and nearly 50% of today’s workers and retirees worldwide expect workers to be worse off than those currently retired with some concluding they cannot afford to retire. Ongoing trends justify these disquieting assessments.