1. Why a ‘time bomb’?
Because the clock is ticking and the math does not add up. By 2035, the basic U.S. system known as Social Security will no longer be able to cover payments, forcing a 20% reduction in benefits, according to its trustees. On a global scale, pension shortfalls will be the equivalent of about 23% of world output by 2050, the Group of 30 consultancy estimated. The financial strain is challenging old-age support systems and leaving many countries facing tough choices about raising the age of retirement, cutting benefits or lifting taxes.
2. How does that go down?
Not always well. Reform proposals in France that would boost the retirement age in some professions spurred national strikes and fed violent “gilets jaunes” anti-government protests. Plans to increase Brazil’s pension age prompted a general strike. Chile abandoned a pledge to expand the private pension system after mass protests. And Russians took to the streets after President Vladimir Putin attempted to lift the pension age. There’s been less fuss about similar moves in countries such as Germany and the U.K.
3. Why have pensions become a problem?
Demographics. The number of over-64s in the world will double to 1.5 billion in 2050, according to United Nations forecasts, while fertility rates are in long-term decline. A key measure is the old age dependency ratio -- the number of older people divided by the population that is working age. In Europe and North America, that ratio will be about 50 per 100 by 2050, according to UN forecasts, a rise from 30 per 100 in 2019. Japan’s ratio is already around 50 per 100 and is on course to breach 75 per 100 around mid-century. In short, we’re on a trajectory toward a smaller share of people paying taxes and a higher proportion drawing pension benefits.
4. What else are governments doing?
With the world’s oldest population, Japan is treading a path others may follow; it increased a deeply unpopular sales tax to boost revenue and has pushed the manager of its giant state pension fund to take a riskier approach buying more equities and overseas assets. According to a World Economic Forum analysis, a bigger challenge than the struggle for adequate investment returns is persuading people to put money aside for later in life; almost half of U.S. households 55 and older have nothing saved for retirement.
5. Why are returns harder to come by?
There’s a lot more money chasing returns; PricewaterhouseCoopers LLP predicts assets under management will rise to $145.4 trillion in 2025 from $64 trillion in 2012. Pension managers have traditionally favored lower-risk investments such as government bonds, since the goal is to provide stable, predictable income. But yields on such bonds have fallen to around zero or even below in the major economies -- the result of central banks slashing interest rates and buying trillions of dollars of bonds to spur economic growth following the 2008 global financial crisis. In the immediate aftermath of the coronavirus outbreak, central banks again rushed into rate-cutting and bond-buying mode.
6. What are pension managers doing?
Some are taking riskier bets. The pension board of the Church of England, for example, began making loans to small and medium companies, while the U.K. rail workers’ pension plan invested in distressed debt -- an area that was once the realm of hedge funds. APG Asset Management, which invests the Netherlands’ biggest pension fund, is buying into toll roads in the U.S. and a Belgian airport. Those moves were made before the coronavirus brought much of the global economy to a grinding halt.
7. How else has the coronavirus changed things?
Governments are ramping up debt, potentially crimping their ability to pay pensions down the line. Australia, with one of the world’s most robust pension systems, is allowing workers to take some money out of their pensions early. Companies have asked to delay making pension payments, while falling bond yields mean pensions that pay fixed amounts must make up the shortfall, potentially forcing them to sell assets. The market meltdown in early 2020 also demonstrated the perils of putting more onus on individuals to manage their own pensions and investments.
8. Have there always been pensions?
Pensions date back to the 1870s in the U.S. and 1889 in Germany, where Chancellor Otto von Bismarck introduced Europe’s first scheme. People aged 70 or over qualified when the U.K.’s first state pension was paid in 1909 -- only a quarter of the population then reached that age. In Japan, the workers’ pension insurance law didn’t come into effect until 1942, at the height of World War II, while a universal pension system only followed in 1961. Even as a relatively recent phenomenon, many people have come to expect the same benefits as older generations.
9. What else might happen?
As well as needing to set aside more cash, people will stay in the workforce longer, depriving younger workers of jobs. The share of Americans age 65 or over working or seeking employment breached 20% in 2019 for the first time in 57 years. According to the Group of 30 consultancy, necessary steps for governments include raising retirement ages in line with life expectancy, increasing financial literacy and offering lower-cost private pensions. Another recommendation: Reduce people’s expectations that a pension will come close to their working-life income.
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