Life’s new certainty: pension reform

May 12, 2014 admin

The three certainties in life have always been “birth, death and taxes,” but today’s world of pension plans with underfunded liabilities has added another item to the list of certainties: pension reform. An ample future workforce helps drive and sustain economies through producing, earning and spending more.

And slowing birth rates in developed nations in the wake of a global recession won’t spur on the kind of economic growth these nations need to see in the future to make ends meet for retirees — quite the opposite, according to a recent CBC News article, “Birth rate stalls after recession, hurting economic growth.”

But it’s not just the global financial crisis that has created a demographic drag in recent years; it’s a trend that started back in the 1960s when greater numbers of women joined the workforce and couples opted to have smaller families, notes the story. And now the these baby boomer couples are starting to retire, and there aren’t enough workers to replace them:

“Couples in the world’s five biggest developed economies — the United States, Japan, Germany, France and the United Kingdom — had 350,000 fewer babies in 2012 than in 2008, a drop of nearly 5 percent. The United Nations forecasts that women in those countries will have an average 1.7 children in their lifetimes. Demographers say the fertility rate needs to reach 2.1 just to replace people dying and keep populations constant.”

Why is population consistency and growth so important? People are living longer, and fewer workers for a growing number of retirees only makes pension funds’ ability to pay out retirement benefits that much harder. While more and more pension systems globally are moving to defined contribution plans over costlier defined benefit plans to help address the issue of underfunded liabilities (and shifting the burden of retirement planning onto beneficiaries), even that won’t be enough.

Take Australia’s superannuation system, for example, which in 2013 was 84 percent DC plans with the remainder DB plans, by far the largest DC to DB ratio in the world, according to Towers Watson’s Global Pension Assets Study 2014 report. But Australia sees the writing on the wall as its ratio of workers to retirees keeps dwindling and is now discussing pension reform efforts, such as raising the retirement age.

And, according to the CBC News article, even if retirement benefits in aging societies were fully funded, increasing numbers of retirees would still slow a nation’s economic growth through reduced output for goods and services, less spending and lower work productivity in the years leading up to retirement.

As debates on pension reform rage on worldwide, what do you think is needed to address these and other concerns?

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific

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