Pensions crisis means we will all be retiring later
The economic crisis will force people to work longer.
By Hugo Dixon, breakingviews.comLast Updated: 12:29PM BST 08 Apr 2009
Higher fiscal deficits will make generous state pensions even more unaffordable, while the fall in asset prices is hammering private pension plans. There are three ways to cope: higher taxes, poorer old people and delayed retirement. All of these will be tried. But the last is by far the best.
Even before the crisis hit, the so-called demographic time-bomb was a worry for most rich countries and some poor ones. Thanks to better health care and a sharp drop in the average number of children per family, more old people will need to be supported by fewer workers.
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In many countries, the crunch point is coming in the next few years, as the last big bulge of babies, born after the Second World War, reaches retirement age. Statisticians measure the "dependency ratio" - the number of people over 65 as a percentage of those aged 15-64. By 2030, this ratio will have increased to 33 in the US, 40 in the UK and 65 in Japan - from 19, 25 and 35 respectively in 2010, according to the United Nations.
Traditionally, families took care of their own. But in rich countries, the government is now the main pension provider. The greying of the population was always going to squeeze government budgets. But the crisis has made a tough situation even worse, as Barack Obama, Gordon Brown and their peers have engaged in fiscal stimulation in an attempt to prevent the recession turning into a slump. The International Monetary Fund expects government debt in advanced G20 countries to jump from 79pc of GDP in 2007 to 104pc in 2014. That doesn't leave much room for pension-related borrowing.
In the UK and a few other countries, private pension plans are an important source of retirement income. Pension experts have long hoped they could step in when governments ran out of funds. But the crisis has also damaged them.
Private pensions come in two types. First, there are those provided by some companies which guarantee retired people a fixed percentage of their final salaries. The companies set up pension funds, portfolios which are supposed to make sure the retirees get what they deserve. The employers are on the hook to pay the pensioners, whatever happens to the funds' value.
The market tumble means that more companies are going to be called on to top up their pension funds. These "defined benefit" schemes have been on the retreat over the past 20 years, as companies have viewed them increasingly as toxic liabilities. The crisis could prove their final death-knell.
Second, there are pensions which depend entirely on a pot of funds accumulated and invested over the years - either by the individual or with some help from the employer. Thanks to the crisis, those pots have shrunk, bringing down the size of people's future pensions.
Pension funding is a problem. But it is important not to forget the good news: people are living longer and more healthily. What's more, if they are going to live to the age of 85, do they really want to retire at the age of 65 and slump down in front of the television getting depressed and lonely for 20 years?
Far better - for them and for their children - to work a few more years, keep their minds engaged and retire with a bigger pension.
For more agenda-setting financial insight, visit www.breakingviews.com
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