A Big Threat to Pensions…and it’s Not What You Think

Scientists have decoded the enzyme that affects ageing.

As Yahoo News reports:

Elated scientists announced Wednesday the completion of a 20-year quest to map the complex enzyme thought to forestall ageing by repairing the tips of chromosomes in plants and animals, including humans.

‘Decoding the architecture of the enzyme, called telomerase, could lead to drugs that slow or block the ageing process, along with new treatments for cancer, they reported in the journal Nature.

This is great news for us, we could be living even longer…

…but not for pension plans around the world.

As I wrote last week, the pension plan is a time-bomb waiting to happen.

Population is ageing and we are living longer.

But, that’s not the only threat to pension funds.

Another major threat is low growth.

Governments are counting on high interest rates and growth to keep the pensions going. Yet, since 2008 we have only had low growth and low — or even negative — interest rates.

In the last decade, world growth as a percentage of GDP has been slow.

I mean, the International Monetary Fund (IMF) has already drawn attention to this in their October 2016 Global Financial Stability Report. As they wrote:

The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates.

And again in their April 2017 Global Financial Stability Report:

In the low-for-long scenario, life insurers and sponsors of defined-benefit pension plans may have no choice but to significantly reduce benefits to policyholders and plan participants over the long term. With permanently low growth and interest rates, guaranteed rates of return are possible only if they are reset significantly lower.

‘A long-term transition from intergenerational collective risk sharing (defined benefits) to individual risk management (defined contributions) appears likely to continue. The combination of lower population growth, aging, and prolonged low interest rates will put pressure on retirement benefit levels.

It could be why Americans close to the retirement age are not as keen to stop working as they were back in 2000. Even with an improving economy and the fact that retirement savings are reaching record highs, workers are choosing to stay in the workforce longer.

According to the US Bureau of Labor Statistics, 19.2% of Americans 65 and over — a record high — are remaining in the workforce. As the graph below shows, this is the highest rate since 1962, up from a low of about 11% during the 1980s.

US Bureau of Labor Statistics chart 30-04-2018

Source: The Boston Globe
[Click to enlarge]

Longer life expectancies and low investment returns means these workers are stretching their work life. Many do not have enough money to retire at 65.

Workers are having a hard time saving after a decade of low economic growth.

Older workers are also starting to see a decrease in social security benefits due to an increase in the dependency ratio. That is, the ratio of people aged 0 to 14, and 65 and over, to the working population.

As you can see in the graph below, the US labour force is changing. The younger portion of the workforce is decreasing, while the 55+ is increasing.

US Bureau of Labor Statistics chart 30-04-2018

Source: US Bureau of Labor Statistics
[Click to enlarge]

Staying in the workforce longer means that young workers are struggling to find jobs. 

The US Bureau of Labor of Statistics (BLS), expects employment growth to be fastest for the 65 and older between 2014 and 2024.  While the other age groups are not expected to change much in the same period, as you can see in the chart below.

US Bureau of Labor Statistics chart 30-04-2018

Source: US Bureau of Labor Statistics
[Click to enlarge]

And unemployment is only expected to increase for younger generations as technology takes a larger role in society.

One of the main problems with living in a world of low interest rates is that you need to save a lot more to accumulate the same amount.

But low wage growth and higher costs of living also means that savings rates have decreased in the last years, as you can see in the chart below. Today, the US personal savings rate is at a meek 3.40%.

US Personal Savings Rate chart 30-04-2018

Source: Trading Economics
[Click to enlarge]

In Australia, things are not much different.

According to rest.com’s ‘Journey Begins’ report, workers are also planning to retire later.

While on average, workers expect to retire at 67, 20% are looking at retiring later than they want to. Financial concern is driving this shift.

Of those, 64% of respondents said the reason for retiring later was that they do not have enough super. 46% said they did not have financial support from the government while 29% have too much debt.

And almost half of all respondents (46%) expect to retire with debt.

With longer life expectations, low growth and high debt adding to the financial stress, retirement at 65 will probably not happen for many.

A market crash or another global crisis could make things even worse.


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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