World faces a retirement crisis

Problems are emerging as the generation born after WWII moves into retirement. The first wave of under-prepared workers is going to try to go into retirement and will find they cant afford to do so, says Norman Dreger,a retirement specialist in Frankfurt,who works for Mercer,a global consulting firm. The crisis is a convergence of three factors:

n Countries are slashing retirement benefits and raising the age to start collecting them. These countries are awash in debt after deficits since the recession. Now,they face a demographics disaster as retirees live longer and falling birth rates mean there will be fewer workers to support them.

n Companies have eliminated traditional pension plans that cost employees nothing and guaranteed them a monthly cheque in retirement.

n Individuals spent freely and failed to save,and saw much of their wealth disappear once recession hit.

Most countries are not ready to meet what is sure to be one of the defining challenges of 21st century, the Center for Strategic and International Studies,a Washington think tank,concluded in a report this fall.

Mikio Fukushima,who is 52,lives in Tokyo,and works in private investment,worries that he might have to move somewhere cheaper,maybe Malaysia,after age 70 to get by comfortably on income from his investments and a public pension of $10,000 a year. If he stayed in Japan,he says,We wouldnt be able to travel at all.

A brief golden age

German Chancellor Otto von Bismarck established the worlds first state pension system in 1889. In the prosperous years after WWII,governments in rich countries expanded their pension systems. In addition,companies began to offer pensions that paid employees a guaranteed amount.

It got even better in 1980s. Many countries began to coax older employees out to make way for the young. They did so by reducing the age employees became eligible for full government pension benefits. The age fell from 64.3 years in 1949 to 62.4 years in 1999 in the countries belonging to the Organization for Economic Cooperation and Development.

That created a new,and perhaps unrealistic,concept of retirement as an extended period of leisure,Mercer consultant Dreger says. That was the Golden Age. Then came the 21st century.

Under siege

As the 2000s dawned,governments and companies looked at actuarial tables and birth rates and decided they couldnt afford the pensions theyd promised. People were living longer: The average man in 30 countries the OECD surveyed will live 19 years after retirement. Thats up from 13 years in 1958. The OECD says the average retirement age would have to reach 66 or 67,from 63 now,to maintain control of the cost of pensions.

Compounding the problem is that birth rates are falling. The higher the percentage of older people,the harder it is for a country to finance its pension system because relatively fewer younger workers are paying taxes.

In response,governments are raising retirement ages and slashing benefits. In 30 OECD countries,the average age at which men can collect full retirement benefits will rise to 64.6 in 2050,from 62.9 in 2010; for women,it will rise from 61.8 to 64.4. Italy is raising the age from 59 to 65. Even France,where government pensions have long been generous,has begun modest reforms. France has raised the number of years people must work before they can receive a full pension from 41.5 to 43.

Across the 34-country OECD,governments provide 59 per cent of retiree income,on average.

If rich countries dont cut pension costs even more,says Standard & Poors,their government debt will more than triple as a percentage of annual economic output by 2050. The debt of most countries would drop to what is commonly called junk status.

Many of those facing a financial squeeze can look to themselves for part of the blame. They spent many years before the Great Recession borrowing and spending instead of setting money aside for old age. The National Institute on Retirement Security estimates that Americans are at least $6.8 trillion short of what they need to have saved for a comfortable retirement. People are going to be shocked at how little they have, says Alicia Munnell,director of Boston Colleges Centre for Retirement Research. For some middle-income people,it will mean cancelling the RV (recreational vehicle that has become a symbol of retiree life in America).

Hit by financial crisis

The worst recession since the 1930s has escalated pressure on governments to reduce spending on pensions. Hungary demanded that its citizens surrender their private retirement accounts to the government or give up their government pensions. Poland seized a portion of private retirement accounts. Ireland imposed a tax on retirement accounts.

Besides the Great Recession has thrown tens of millions of people out of work worldwide. For many who kept their jobs,pay has stagnated even as living costs have risen,making it tougher to save. In addition,government retirement benefits are based on lifetime earnings,and theyll now be lower.

When the financial crisis struck,the worlds central banks also cut interest rates,hitting investments as a source of revenue. The low-interest rate environment is brutal, says Catherine Collinson,president of the Transamerica Center for Retirement Studies.

The Asia challenge

Traditionally,Chinese and Koreans could expect their grown children to care for them. But newly prosperous young people increasingly want to live on their own.

South Korean public pensions pay an average of $744 a month. South Korea has the rich worlds highest poverty rate for the elderly. It has one of the highest suicide rates for the aged too.

China,too,will struggle to finance retirement. China pays generous pensions to civil servants and to urban workers. These workers can retire early with full benefits at 60 for men and 50 or 55 for women.