What do you see as the biggest policy obstacles for pensions in the future?
Debra Whitman, AARP Chief Public Policy Officer
The old paradigm of retirees having the support of a three-legged stool consisting of Social Security, employer pensions and personal savings seems from a bygone era for many people in the US.
Employer defined benefit pensions have become increasingly rare. Savings are insufficient, with many adults having none at all, not least because largely stagnant wages and a rising cost of living have made it hard for most earners to set even a little aside. Less than half of US employees have access to retirement savings plans in the workplace.
Fortunately, almost everyone is covered by Social Security–which in the US refers to a specific social insurance programme for the retired, survivors and the disabled. Its guaranteed benefits, earned through at least 10 years of employment and payroll tax contributions, keep one in three older people in the US above the poverty line. For about one in two retirees, Social Security provides at least half their monthly income.
Yet Social Security benefits are modest by Western standards, replacing only 40% of average income, compared with closer to 60% in other OECD countries. And as things stand, the programme will not be able to pay all promised benefits by 2034, according to its trustees. Unless changes are made, benefits could be cut more than 20% across the board at that time.
Policy experts have long highlighted measures that would address the shortfall–through raising payroll taxes, cutting benefits, or a combination of the two. The political will to address Social Security has been lacking, although there are clear advantages to acting sooner rather than later.
Anyway, even if fully funded, Social Security benefits are likely to remain modest, so it is important to strengthen other retirement resources.
One encouraging development, seven states–California, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Washington–have passed laws that help workers build nest eggs, typically through payroll deductions. Once implemented, these new programs will result in the greatest increase in the number of workers with access to retirement savings in several decades. However, federal regulations that made the establishment of state plans easier are under attack by some in Congress, and if they are repealed, the future of these reforms will be jeopardized. For that reason–and the fact that state plans will not include everyone–a national plan that covers all workers throughout their entire career is still needed.
The reality is that each leg of the traditional stool needs shoring up, or millions will see their dreams of a golden retirement turning to bronze–at best. We must find ways to avoid that outcome.
Catherine Collinson, Executive Director, Aegon Center for Longevity and Retirement, and President, Transamerica Institute and Transamerica Center for Retirement Studies
Governments around the world are facing intense financial pressures with their social security retirement programmes. In the US, where I live and work, Social Security serves as the primary source of retirement income for millions of people. However, its trust fund is projected to become depleted in 2034. At that time, unless Congress has enacted reforms, it would only be able to pay 79% of its promised benefits.
Globally, while governments are mustering up the wherewithal to tackle these pension funding-related issues, most people already recognise that change is necessary. According to findings from the Aegon Retirement Readiness Survey 2016 of 16,000 workers and retirees across 15 countries, a scant 7% of respondents said their governments should do nothing because they feel their country’s social security provision will remain perfectly affordable in the future.
Maintaining the long-term sustainability of national social security programmes is one of the most far-reaching challenges facing policymakers today. It cannot be achieved without the possibility of controversial trade-offs such as raising taxes, reducing benefits, or increasing the retirement age (amid the absence of meaningful employment opportunities for older workers). Even more daunting is how to solve the problem fairly and equitably, across generations and levels of need, and in a way that addresses the risk of poverty among the elderly in the future.
Whatever the reforms may be, it is inevitable that individuals and families will ultimately be required to pick up the slack, with some being more affected than others. Workers will place an even greater reliance on their employers for retirement benefits. Those without access to workplace retirement benefits will face an even greater need for meaningful ways to save and avoid being left behind.
Without reforms, the social security funding shortfalls will likely stay the same or increase. The longer policymakers wait, the greater the potential abruptness and magnitude of the changes, and the harder it will be for everyone to adjust their plans and expectations accordingly. It is clear that the current retirement system is not tenable. Should we not be engaging in the hard conversations about the sustainability of our view of retirement? Should we not be more committed to finding workable solutions?
It is time to stop ignoring the issues–and it is time to start rolling up our collective sleeves and get to work.
Neuma Grobbelaar, Director of Research, SAIIA
Africans have experienced a significant increase in their life expectancy in the 2000s to reach an average life expectancy of 60 years in 2010-2015. Longevity is increasing across the world and the UN projects that by 2050, 80% of over 60s will be living in developing countries. They are also the fastest growing population segment in Africa, increasing by 50% between 2000 and 2015 and projected to increase fivefold by 2050.The last few years have focused the discussion on Africa’s youth bulge as a ticking time bomb in the absence of sufficient employment creation, but its elderly also require more healthcare, housing and social support.
Social welfare policy in Africa is under-developed and nascent, albeit growing. Pensions are crucial in this sphere: in South Africa pensioners are often the main caregivers and through their grants the sole income earners of many rural but even urban families where unemployment is rife.
Nonetheless, only 10% of the adult population in Africa is covered by a pension fund. Within this group, pension funds for civil servants are widespread and African upper MICs have between 40-70% coverage. Nonetheless, apart from South Africa and Namibia, most African countries have very low levels of pension penetration rates, also reflecting the informality of employment.
Coming off such a low base, there are at least five key areas that require significant policy attention to bolster pensions in Africa. These are: (1) improving the tax systems and revenue collection base of African countries; (2) ensuring political and fiscal stability; (3) developing a savings culture with an eye to retirement; (4) regulatory reform; and (5) enhancing coverage.
For African countries it is especially necessary to explore how pension reform could credibly contribute to a social security system that accommodates a multi-pillar retirement system. This should include non-contributory universal pension schemes; mandatory income related savings; and lastly, voluntary savings. A step in the right direction is the adoption of legislation such as the Taxation Laws Amendment Act in 2015 by the South African parliament, which seeks to harmonise the tax treatment for all types of retirement funds, including pension, provident and retirement annuity funds and to promote a retirement savings culture in South Africa.
Visit the South African Institute of International Affairs website at www.SAIIA.org
Romi Savova, Founder and CEO of PensionBee
How can policymakers expect ordinary people to save for retirement if pension schemes are so hard for even the experts to understand? The complexity surrounding pensions is the core issue that prevents our generation from engaging with retirement savings. Even Andy Haldane, chief economist at the Bank of England, remarked that he could not make the “remotest sense of pensions”.* I believe it is a similar case for other OECD countries as well. It is vital that we respond to such concerns and focus on eradicating jargon, moving pensions online and ensuring pension mobility.
A good place to begin would be standardising customer communications. Savers yearn for transparency and authenticity, but most providers have their savers combing through the actuarial dictionary for words like “pension commencement lump sum”. If providers can’t explain how pensions work in normal language, why should we expect people to save? It is time to build a new language for pensions so that people today understand the benefits (and indeed, the imperative) of retirement saving.
The ways providers and savers communicate must also evolve. We need more technology-focused policies to bolster the future of pensions. At PensionBee we believe that managing pensions should be as easy as online banking, and our online service has attracted hoards of savers seeking transparency and access to their balance. At the same time, we have seen some remarkably antiquated practices from the legacy firms, many of which seem removed from the digital world we live in.
One provider insists on being addressed only with the full form of its rather obscure name through the post; others refuse to respond if the relevant account number is mentioned only on page two of a given letter.
Many consumers find such requirements baffling, if not impossible to navigate. They also create costs for providers. We need to get rid of unnecessary paper trails and simplify online access to information, where appropriate. The pension dashboard initiatives across the world, such as Australia, the Netherlands, Sweden and the UK, are welcome steps forward.
Finally, we need policies to help consumers switch providers smoothly and simply. Upcoming generations have to be increasingly mobile, travelling from job to job and country to country. While bank account switches and currency transfers can be done in a week, some laws, including UK legislation, allow pensions providers to take six whole months to transfer a pension. In that time you could travel around the world about 87 times. It is time to give savers ownership over their retirement savings, and the freedom and empowerment to choose where they keep their money.
*See for instance, “Bank of England chief economist Andy Haldane admits he can't make sense of UK pensions”, report in www.independent.co.uk, 19 May 2016
Musa Bajwa, Manager, Public Relations, AIESEC*
Today’s youth is vastly informed and take considerable interest in the evolution of the world and their environment. According to UN The State of the World Population 2014 report; there are currently around 1.8 billion young people aged 18-25 in the world.
According to The Youthspeak Survey held by AIESEC which was globally answered by over 160, 000 young people, some 61% of respondents either want to become an entrepreneur or already are one. When asked what the most important in the first five years of developing their career, one in four millennial listed global experiences as a choice.
This shows us that generation Y/Z is and will be an extremely mobile workforce that values experiential learning over the traditional career-building techniques.
We are putting forward these results because, according to most OECD member countries' pension policies, they are not taking into account the inputs of the generation that has to work to make sure that the pension programmes in their countries remain relevant.
According to OECD Pensions at a Glance, “The share of individuals aged 65 and above will increase from 8% of the total world population in 2015 to almost 18% by 2050 and from 16% to 27% in the OECD”. This in turn will put added strain on the working-age population, which will significantly have to sustain the pay-as-you-go (PAYG) pension schemes for an increasing number of elderly people in their countries. We also need to remember that a large percentage of young people are more interested in working in different places than in their own country.
Lastly, knowing this, the question is, what change would be needed from our respective countries to make sure that young people are actively and consciously being engaged in the process of pension policy formation within their countries?
* International Association of Students in Economic and Commercial Sciences, visit www.aiesec.org
©OECD Observer No 309 Q1 2017