SINGAPORE (Sept 6): Historic-low interest rates, staggering levels of public debt, expanding old-age dependency and eroding quality of life for retirees are some of the economic realities and societal trends putting retirement security under much pressure in the decade following the Global Financial Crisis (GFC).
In theory, retirement security should work on the principle of workers saving over a lifetime, employers providing retirement benefits, and policy makers collecting payroll taxes to fund government benefits. However, in reality, the traditional three-pillar model is no longer able to live up to the promise of retirement security.
“To make retirement security systems more sustainable, it is critical for policy makers to understand how these and other factors pose a risk to retirees in order to strike the delicate balance needed to ensure long-term sustainability of retirement systems globally,” says Natixis Investment Managers in its 2018 Global Retirement Index report.
Here are four main threats confronting retirement security:
1. Monetary policy that’s perpetually stuck in crisis mode
A decade of low yields has translated into greater liabilities for pension managers who have fewer options for growing assets over the long term.
This is likely to be one of the main reasons why respondents to Natixis IM's 2017 Global Survey of Institutional Investors rank interest rates as their top portfolio risk concern (62%), ranking it higher than volatility spikes (53%), liquidity (32%) and inflation (27%).
“The big challenge going forward will be how rate hikes are implemented as central banks start the unprecedented process of quantitative tightening and raising interest rates to normal levels,” says Natixis IM. “While higher rates will be a positive for pensions and pensioners in the long run, it is the short run that poses an immediate challenge.”
2. Slow growth and the weight of public debt
Even though markets recovered from the GFC, they now presented a new and maybe bigger threat to global retirement security – staggering levels of public debt.
Policy makers have limited funds to work with and retirement benefits, education, and infrastructure must all vie for a share of the same revenues that fund both defence budgets and interest payments on public debt.
“As debt increases, the funding available for retirement benefits and other social services decreases. Depending on who’s in power at any given time, tough decisions will have to be made about where to spend and where to cut,” says Natixis IM.
3. Old-age dependency keeps growing
According to United Nations data, the world’s population of individuals age 65 and above increased from 6.2% in 1990 to 8.3% in 2015. But it is within the next 25 years that the ageing phenomenon is likely to reach critical mass in the developed world, as the number of individuals age 65 and older is estimated to reach 25.2% in 2040.
Old-age dependency ratios measure the burden placed on workers to provide pension, healthcare, and social security benefits to retirees. The higher the ratio, the greater the burden on workers. Policy makers have limited tools at their disposal to help alleviate the impact of aging on retirement systems, few of which are popular.
While immigration is also seen by some policy makers as an opportunity to offset an aging population by increasing the number of working age individuals within their country, this remains “a hot button populist issue across the globe”, says Natixis IM.
4. Eroding quality of life for retirees
Access to employment opportunities, healthcare services and a clear, stable environment are all essential to ensuring a high quality of life for retirees in the 21st century. However, employment in the decade following the GFC is an issue that has evolved from record unemployment to the appearance of the gig economy to the rise of automation and machine learning.
Although the gig economy can give employers access to qualified workers without adding to benefit and tax rolls and give workers access to flexible employment, it can present a significant long-term retirement problem if gig workers do not have access to retirement savings plans.
Rising healthcare costs present yet another quality-of-life challenge to retirement security. Following the logic that as individuals age, so do the frequency and severity of health issues, it is right to assume that on average retirees face much higher healthcare costs than they did in their younger years.