• Climate for retirement different than even two years ago. Though the outlook is better, confidence is low. • After 9/11, markets shaken, confidence reeled but recovery expected; This is different. •Pre-retirees with large equity exposures hit hardest. Plans mothballed. • Opportunity to address fundamental weakness in our RS infrastructure, in gen'l w/ lg institutions and education for upcoming and current retirees.
• Fixed income returns low for retirees • Predictions abound, but volatility is expected • Certain regions less bad, but tax revenue implications with states having to cut spending and/or raise taxes. Hardest hit countries--US, Jap, Ger, UK • Concerns about stimulus' effect on future economic growth and debt implications
• Levels of US wealth dropped 18% at year end ’08--to pre-2004 levels. • DC holders have to ride out down mkt or shift to more conservative investments w/i portfolio. • DB: Is my plan going to be able to deliver promised benefits?
• Cracks revealed in approaches • Overconfidence in fin’l engineering, heightened sense of global market’s competition spurred the race to the bottom (thought to the top ala returns) • Confusion about signals bc media focus on stk mkt. • Need knowledge about risk management applied to ind. HH. Lacked knowledge of personal liability or responsibility in plan(s)
Demographic changes are a certainty, its impact uncertain.
We’re aging--a meta-trend. We will add more retired for workers to support.
Around the globe, many populations of developed countries are aging, some developing too, like China.
Taking the individual country level, and looking at population changes are even more meaningful. These numbers matter when looking at workforce issues.
• Shows that as a pension fund, you need to look at individual states’ characteristics, trends, and other influences--i.e., micro-level trends.
Pressure points on the horizon that will impact security going forward. • World more globalized than 2 decades ago even; fin’l mkts integrated. • Re: Asset p: Theory says.. and empirical evidence • Down trend of i rates: as dissaving occurs, then i rate rises. • S-t developments like bubbles and mania, etc. impact the theoretical projections. (Hyman Minsky)
So how does aging impact economy... • GDP declines apply to OECD co’s (one-third less than growth in period 1970-2000) • I think the burden will be noticeable w/o changes. Workforce declines 10-15%. • Changes must come.
Changing incentives can deal with shortfalls, by increasing worker participation rates (Llewelyn) • In 50’s it was much higher owing to a lack of disincentives to work. • Will next 50 look like last 50 year; it cannot.
• Given mega trends-fin’l crisis, demo, global econ--what now? • Not clear w/Obama admin. • Unable to tax way out of 80-120 trillion shortfall • Incentives matter as in effective rtmt ages and HC: fund avail/ben owed. • Poland, ave age 58 + rich benefits at over 10% GDP; generational conflicts already • Jap: aging pop, shrinking econ, but people still working later; up to 2050, pop decreases 20% w/ dependency ratio 1:1. • Netherlands changed plans to ave. wage from final pay after 2001 to shore up pensions.
• Need tools to discriminate btwn choices • Past relied on employer • Start with you as partner; you can guide them.
to control one’s retirement destiny--offer the chance to reduce vulnerability and control future
In an Era of
The Economic Climate
• Low interest rate environment
• Market returns up/down, stable?
• Economy weak, some regions hit harder
than others (eg. Detroit, NY, CA); some
• Glimmers of hope as ‘clean up’ continues
Impact on Retirement
• Losses in both DC and DB plan $4 trillion
between Oct 2007 to Oct 2008 with the pain
shared about equally.
• Those with DC plans experienced a loss of
wealth, conﬁdence, and security.
• DB plan beneﬁciaries, more a loss of security,
questions of conﬁdence in future.
• The fundamentals still apply.
• Finding alternatives to minimize loss,
depending when retirement date approaches.
• Exposed ﬁnancial vulnerabilities; markets not
invincible and ﬁnancial innovation no
• Need to view options with new set of lenses,
ie., framing of accumulation and decumulation
• Need awareness of market risk vs. longevity
• Populations are aging in developed world
(China and Russia too)
• Oldest region is Europe (Italy, Germany
• Globally, 1 in 14 is 65 years +; by 2050, 1 in 6
(Japan is 1 in 5)
• Oldest-old 80 years +, fastest-growing
population, to increase four-fold (UN
Baby Boomers Gen X
• Numbers by Gen Y
generation US 0 20 40 60 80
• Individual states’
worker-elderly ratios Millions
will vary due to
• Asset prices
• Assets prices are expected to decline as savers
cash in their portfolios.
• The downward trend of real interest rates and
equity yields of developed countries (OECD)
could ﬂatten and reverse; the opposite is true
for younger societies (India, Latin America).
• Professor Siegel of Wharton says it will take
massive investment by people in India, China and
other developing countries to prevent a US
• But microtrends impact markets, economies.
• If workplace participation rates stay the same
(with same retirement age incentives), GDP
growth declines to 1.7% annually over three
• In business as usual mode, massive burden on
workers with similar pressures on publicly funded
healthcare and pensions.
• Will need new workplace policies and incentives.
Economic Activity Rate % of 60-64 year-olds
Germany Japan US UK
Finding the Balance
• Getting more
promises in HC and
• Need for
funds available and
• Tipping points around the globe, ability to pay
e.g., Netherlands, Japan, Poland
in the Future
• More fashioned by individual knowledge
with greater access to information and
education, but better due diligence will be
• A civil approach with transparency and
personal responsibility the foundation
• Understanding of how to control one’s
personal retirement security infrastructure