One of the most important issues whether it is Brexit or the American election confronting individuals is the fate of the economy and their financial future, especially their pension.
Retirement for many is becoming less likely and those depending on a secure financial future realise they may have far less in their pension pot than what will be necessary to take care of them in their last years. One enormous concern is the issue of pensions and their lack of funding.
Charles Millard, Head of Pension Relations & Managing Director for Citigroup reports that the total value of unfunded and underfunded pension liabilities for the 20 countries in the Organisation for Economic Co-operation and Development (OECD) is at $78 trillion. Corporate pensions especially in the U.K. and U.S. are the most underfunded. The worst for large public pension obligations are in Europe including Germany, France, Italy, the U.K., Portugal and Spain with pension liabilities at almost 300% of GDP and the U.S. at about 50% of GDP.
Retirees are now living longer and the effect on pension schemes is a growing problem between the retirees and those who are working with both sides having to stretch their incomes even further.
“Government services, corporate profits, or retirement benefits themselves will have to be reduced to make any part of the system work. This poses an enormous challenge to employers, employees, and policymakers all over the world.”
The suggestion from Citi ‘advised that government-funded pensions should serve merely as a “safety net,” rather than the prime pension provider, and that corporate pensions should be “opt out” rather than “opt in” to encourage greater enrollment.’
Earlier this year The Express UK reported some gloomy statistics for Britain’s workforce and retirement. Almost one quarter of Britain’s workforce or seven million workers say their retirement plans are in jeopardy due to record low interest paid on their investments. The report also stated that 21 million employees or two thirds of the 31.5 million currently working will have no choice but to continue to work past the retirement age of 65. Almost 44 per cent of employees say the saved amount in their pension will not be enough for them to retire at 65.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said “Savers have faced an endless spiral of misery when it comes to rates on savings accounts.
“While this has hit everyone, those who are thinking about retiring soon have been hit the hardest.
“With poor returns their cash pots have not grown as much as expected.
“Older savers have little choice left. They either opt for risky avenues such as stocks and shares, risking saving pots for a higher return, or put up with low rates in the hope they will eventually rise.”
The Express quoted Keith Richards, chief executive officer at the Personal Finance Society, problems as “a consequence of past governments meddling with long-term savings and pensions”.
“The stark reality for many, however, is that the need to continue working past 65 will be one of necessity, not choice.’
Across The Water
In the U.S. a report by Richard A. Marin (newyorkwheel.com) sheds some light on the growing pension problems facing the nation he states that: ‘The Social Security Administration expects funds to be depleted by 2033. In Detroit, federal bankruptcy law has taken over state pension law and pensioners are going to get only 16 or 17 cents on the dollar.’ Concerns are also mounting on pension schemes in large cities such as Chicago where bankruptcy has been considered as a possibility.
The report also references the issue of aging and retirement: ‘The International Monetary Fund created an important ratio called the “old age dependency ratio,” which is the ratio of retired people to working people. The ratio is quite important in calculating whether countries have what it takes to survive this pension crisis.’
Marin reports that some economists are predicting a ‘game over’ scenario in the next 30 years. This would lead to a point “that the government’s obligations to seniors will exceed 100% of everyone else’s earnings. In other words, all of the young workers in the United States together will not earn enough to pay down the government’s obligations to their parents.”
‘Demographics are the biggest problem, with Europe, Japan, and China in serious jeopardy. Emerging market countries are better off and growing fast enough to get out of the problem. Unlike debt, the retirement funding problem cannot be inflated away because inflation does not reduce basic needs.’
For anyone considering retiring, the strength of their pension pot and how to stretch the money is now a major critical issue. This challenge extends to high net worth individuals (HNWI) as much as lower wage pensioners. The FT Advisor reported that popular over the past few years with HNWI are the options of annuities and drawdowns. Annuities provide the security of income and thus have been popular but also gaining in popularity over time have been drawdowns for those with a pension pot of £200,000. This allows for the pension pot to remain invested and take the income and tax-free payments or take the tax-free cash lump sum and use the taxable income. One benefit from drawdowns has been the ability of financial advisors to manage client’s long term retirement income. There are any number of plans available from advisors depending on the client’s age and future financial needs.
With the outlook so dire in regards to the financial future for retirement age workers, what can be done to stop a potential financial meltdown?
In his report Marin recommended: ’The only solution I see is to fix the future hole first by shifting as much as possible away from defined benefit and pay-as-you-go plans and then to figure out how to bring more assets in to fund the crisis. The only way I see to bring in more assets quickly enough is through privatisations. There will be a big public debate about it, but there will not be any other choice.’
‘An increased investment in more aggressive investment alternatives may be another way to fill the gap.’
Public involvement is also critical to put pressure on policy makers. One example, were the finances in the city of San Jose, California, regarding its pension system which eventually became so problematic that all city employees were paid minimum wage no matter what their profession or position was in the city government. A report was published in a local newspaper on what city retirees were receiving in pension money. Turns out a retired fire chief was receiving nearly $97,000 a year in retirement money.
Marin recalls: ‘He was in the grocery store buying steak and beer, and some people in the grocery store who had read the article that day ran him out of the store without his steak and beer. I expect that policymakers will respond when people make more scenes like that.’
Article by Kevin Murphy: www.kevinmurphy.london