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Pensions under stress

26 November 2013
by Patrick Love

The good old days

Imagine the scene reported in Der Spiegel in February 2010. A ruthless gang of kidnappers have forced their helpless victim to fax his bank and withdraw millions for them. But the victim is not as helpless as he seems. Unknown to the gang, he slips a secret message into the fax, and his banker tips off the police. A crack antiterrorist unit springs into action, surrounding a cosy villa in a sleepy holiday town. The highly-trained commandos manage to overpower the criminals, including the 74 year-old ringleader and his 80 year-old wife, along with three other pensioners. At their trial, the judge refused to believe that they’d simply invited their victim for a stay in the mountains to help him think better. Probably because they’d broken his ribs and bound and gagged him during the journey.

Why did people you’d expect to write to the paper complaining about the youth of today end up with convictions for kidnapping, torture and other serious crimes? The victim was their financial adviser and his kidnappers lost 2.5 million euros (about $3.4 million) when the subprime market collapsed, taking a substantial part of their retirement funds with it.

Despite the seriousness of their crimes, the gang did get some support, especially among people their own age, usually stout defenders of law and order. In the UK for instance, the following are typical of comments in the Daily Mail, 36% of whose readers are over 65, and 56% over 55: “OK, they shouldn’t have done it, but I can understand their frustration.” Or, “I admire these old people. They worked all their lives in order to have a comfortable retirement. To watch it all go up in smoke because of a con-man and shyster is unforgivable.”

These reactions are one expression of widespread anger against financial institutions, aggravated by the millions in bonuses their members award each other, but the financiers don’t get all the blame. Governments across the OECD urged citizens to “take responsibility” for their retirement by investing in private pensions. The financial crisis and the collapse in share prices left many people feeling they were given poor advice. They get the impression that in spite of doing all the right things, they face a bleak future.

In many cases, they’re right, especially if they’re poor or have had periods out of the workforce due to unemployment or to raise children. OECD Pensions at a Glance 2013, published today, says that the social sustainability of pension systems and the adequacy of retirement incomes may become a major challenge. “Future entitlements will generally be lower and not all countries have built in special protection for low earners. People who do not have full contribution careers will struggle to achieve adequate retirement incomes in public schemes, and even more so in private pension schemes which commonly do not redistribute income to poorer retirees.”

The OECD argues that people should work longer and save more for their retirement to ensure that benefits are adequate to maintain standards of living into old-age. Most OECD countries will have a retirement age for both men and women of at least 67 years by 2050, an increase from current levels of about 3.5 years on average for men and 4.5 years for women. Recent reforms will mean that most workers entering the labour market today will get lower pensions than previous generations and will need to save more for their retirement. Working longer may compensate for some of these reductions, but overall each year of contribution will pay out less than today.

Looking just at the figures, you could get the impression that this is a golden age for old age. Pensioner poverty shrank to 12.8% in 2010 from 15.1% in 2007, with falls in 20 countries and rises in only Canada, Poland and Turkey. Children and young people now face higher poverty rates, at 13.4% and 13.8% respectively. But old-age poverty is likely to be higher in reality. Not all pensioners who need last-resort benefits to supplement their income actually claim them, due to stigma or lack of information on entitlements. Further cuts to public services like healthcare could hurt pensioners in particular.

This grim picture of what’s in store for old people comes just after A Good Life in Old Age? another OECD warning about what to expect when you grow old if nothing is done now to change policies and practices. A coordinated barrage of depressing reports on everything that matters to “seniors” probably isn’t what the authors of Pensions at a Glance have in mind when they argue that a “holistic approach to ageing is needed”. The Pensions at a Glance editorial argues that since retirement incomes reflect employment and social conditions over the whole career of an individual, pension systems alone can’t correct inequalities and compensate for breaks during working lives.

Ageing societies will therefore need much more policy action than just pension reform. They will need much more strategic thinking around a series of questions the editorialists don’t claim to have all the answers to. What should our societies of the future look like? How will we deal with the old-age care challenge? What will be the fiscal impact of ageing and what will this mean for social protection systems and the sharing of responsibilities between the individual and the state, between public and private service providers? And how can we maintain solidarity in a context of rising inequalities between and within generations?

You can read the full report below:

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