Broken Promises: Can The World’s Stressed-Out Pension Plans Be Rescued?
Posted By thestatedtruth.com on December 6, 2010
This is an interesting summary of a review on retirement plans “Broken Promises” from Knowledge@Wharton ……
From the women’s movement to the sexual revolution, the generation of 77 million baby boomers born in the United States between 1946 and 1964 has spent the last five decades loudly breaking new ground. Now, as they head toward their “golden years,” they promise to redefine those as well — though not entirely in the way they might have hoped. While boomers want to keep working to remain active and earn needed income, they are woefully unprepared to finance the decades after standard 9-to-5 careers.
Without such preparation, the trail they blaze into their twilight years may provide inspiration to future generations solely as an example of what not to do. The boomers will become “the guinea pig generation,” says finance professor Richard Marston, who directs the Weiss Center for International Financial Research at Wharton. “We will learn from their bad experiences.”
By 2050, developed countries will average just two people between the ages of 15 and 64 for each person 65 and older, according to the United Nations, down sharply from five younger persons for each older one in 1999. With fewer people to finance their retirement, older individuals will have to settle for less generous benefits or spend more years on the job, or perhaps do both.
The Action: The growing imbalance is forcing governments to revamp their retirement promises in sometimes politically explosive ways.
- In October, French lawmakers voted to raise the retirement age from 60 to 62 despite rancorous street protests, with the increase to take full effect in 2018.
- Germany is gradually raising its retirement age from 65 to 67 beginning in 2012 and taking full effect in 2029; Spain plans to phase in a similar increase between 2013 and 2025.
- In Britain, the retirement age will rise from 60 to 65 for women and from 65 to 66 for men by 2020 and is to reach 68 for both sexes by 2046.
- China and India, the world’s two most populous countries, are reconsidering their retirement ages. Rapidly aging China is studying raising the age from 50 for female workers and 60 for males, without saying what the increases might be. India is mulling a move to boost the age from 60 to 62 for central government employees.
- While Sweden has kept its retirement age at 65, the country indexes its pensions to longevity projections so that monthly benefits fall when the national longevity rate rises.
- Australia, which requires employers to contribute to workers’ privately managed retirement accounts, plans to increase the mandatory contributions from 9% to 12% of pay by 2019 to bolster the funds.
Social Security — The Challenge: Although the United States is aging less rapidly than Europe or Japan, the strain on Social Security is growing. Some 155 million U.S. workers paid Social Security taxes to cover about 38 million recipients in 2000, for a ratio of 3.4 workers per beneficiary, according to Social Security trustees. Today, roughly the same number of workers supports 43.5 million beneficiaries for a ratio of 2.9 to 1. That number is certain to keep falling as 77 million baby boomers move into retirement.
The Social Security trust funds are projected to run dry by 2037, at which time payroll taxes will cover just 78% of the benefits that retirees will require. But the date 2037 belies the true nature of the crisis that is already unfolding, says Kent Smetters, professor of insurance and risk management at Wharton. “The system is taking in less money than it’s paying out,” he says.
Nor is the system’s $2.6 trillion trust fund really something to fall back on, according to Smetters, since Washington counts the fund as both an asset for Social Security purposes and a source of financing for the federal debt. This amounts to “counting the same dollar twice,” Smetters says. “The real question is, ‘What is our nation’s ability to pay future retirement benefits?’ The trust fund itself does not really contribute to that ability.”
The Action: The United States has quietly reduced Social Security benefits “through the back door,” says Wharton’s Mitchell. In the past, only half of Social Security income was taxed,” she says. “Now it’s up to 85% and it may go up to 100% if the system gets into worse trouble.”
But such fixes may be stopgaps at best. The chairmen of President Obama’s have floated the idea of raising the full Social Security retirement age to 69, up from the current ceiling of 67 for those born since 1960. Raising the age to 70 would solve about 20% of the Social Security shortfall, says Smetters. Attacking such increases are critics who say that raising the age would leave people who hold physically demanding jobs unable to work long enough to collect full benefits.
Permanently eliminating the annual cost-of-living-increases for Social Security benefits could be another step toward fixing the program. These increases began in 1975 and will be suspended in 2011 for the second straight year because of low inflation. But like the notion of raising the retirement age, the idea of permanently ending the increases is highly controversial.
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