Retirement Security
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The document discusses challenges to retirement security in an era of economic uncertainty. It notes losses in retirement funds between 2007-2008, implications like the need for new ways to minimize risks, and increasing longevity. Demographic changes like population aging in developed nations are examined. Pressures on asset prices, the economy, and finding a balance between promises and funding abilities are also covered. The future may require more individual responsibility and education around retirement security.
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Retirement Security
- 1. Charting Retirement Security In an Era of Uncertainty
- 2. 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 countries too. • Glimmers of hope as ‘clean up’ continues
- 3. Impact on Retirement Funds • 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.
- 4. Implications • The fundamentals still apply. • Finding alternatives to minimize loss, depending when retirement date approaches. • Exposed financial vulnerabilities; markets not invincible and financial innovation no superhero. • Need to view options with new set of lenses, ie., framing of accumulation and decumulation stages. • Need awareness of market risk vs. longevity risk.
- 5. Demographic Changes • Populations are aging in developed world (China and Russia too) • Oldest region is Europe (Italy, Germany oldest) • 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 projections ’06)
- 6. Generational Changes US Generations Baby Boomers Gen X • Numbers by Gen Y generation US 0 20 40 60 80 (approximates) • Individual states’ worker-elderly ratios Millions will vary due to migration, minority influences
- 7. Pressure Points • 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 market meltdown. • But microtrends impact markets, economies.
- 8. Pressure Points • Economy • If workplace participation rates stay the same (with same retirement age incentives), GDP growth declines to 1.7% annually over three decades (OECD). • 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.
- 9. Economic Activity Rate % of 60-64 year-olds 100 75 50 25 0 Germany Japan US UK 1950 2000
- 10. Finding the Balance • Obama administration policy • Getting more realistic about promises in HC and SS • Need for transparency about funds available and • Tipping points around the globe, ability to pay e.g., Netherlands, Japan, Poland
- 11. Retirement Security in the Future • More fashioned by individual knowledge with greater access to information and education, but better due diligence will be required • A civil approach with transparency and personal responsibility the foundation • Understanding of how to control one’s personal retirement security infrastructure
Editor's Notes
- • 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