Finance

Pension Systems Struggling to Overcome Asset Shortfalls; Reforms Needed

On a global basis, public pension systems are on a troubling course for a range of reasons. The pressure for reform is heightening in the face of an aging population, World Economic Forum white paper, for example, projected a global pension asset shortfall of $400 trillion by 2050, a function of converging factors like aging populations, longer life expectancies, lower fertility rates, and lower interest rates. Escalating government debt plays a role, too, along with a competitive global business marketplace.

Reforms are urgently needed. But too often, too many vested interests may keep that from happening.

“The mature retirement markets, like the U.S. and the U.K., are struggling, but pension system reform is also an issue in emerging economies, where politics and corruption can further hobble pension systems,” says Nellie Mayshak, a public administration reform specialist.

The U.S. Social Security System’s trust fund, for example, is fast being depleted. Without reform, it is projected that revenue from payroll taxes will only be adequate to pay 77 percent of recipients’ benefits by 2035.

The U.K. currently has a $4 trillion retirement savings shortfall, which could skyrocket to $33 trillion by 2050. This is a situation that’s shared throughout Europe. And while workers in developed countries can expect government programs to replace 63 percent of their working incomes, in the U.K., that figure is only 38 percent – the lowest of all the OECD nations.

“It’s a problem that is far bigger than even the most disciplined, future-focused governments and businesses can easily handle,” writes financial analyst and author John Mauldin in Forbes. “Worse, generations of politicians have convinced the public that their entitlements are guaranteed. Many politicians actually believe it themselves.”

For all the talk of reforms, though, they may be easier said than done. Nellie Mayshak says that lack of accountability and bottom-up imperatives for change can make it a daunting proposition in some situations. After managing a UKAid-funded reform project in Nigeria, the country’s administration convinced her to take on the reform of its civil service pension system – an overhaul mandated in 2004 but was still undone in 2013.

“It was a challenge that was more complicated and yet more basic than what many established governments face today,” says Marshak. “It wasn’t a matter of looking at best practices, designing good policies, and putting the right tools like tax incentives in place. We had to consolidate  a new central pension system comprised of many government agency fiefdoms, where the beneficiaries were typically not pensioners but unscrupulous civil servants.”

Fixing Nigeria’s public pension system might have been an extreme case, one that sparked intense resistance and false charges against its change agents. But it’s not unusual for pension systems to become a source of considerable political and social irritation.

According to a recent Brookings Institute report, Latin America is also facing worrisome problems with pension systems in the region, and issues are becoming hot potatoes in policy debates. For example, Brazil’s pension deficit is at risk of spinning out of control without reforms proposed two years ago. The type of system that Brazil, Argentina, and Venezuela employ (pay-as-you-go-defined-benefit) poses fiscal sustainability problems as governments expand pension promises but not contributions – widening the actuarial deficit.

The global crisis in the pension system is taking various forms, and just about every nation is grappling with it to some extent. Writing for the World Economic Forum Annual Meeting, Daniel Houston, CEO of Principal Financial Group, argued for continued pension reform, including improving financial sustainability and income advocacy.

Other future actions could include higher contribution rates and longer contribution periods and supplementing public systems with voluntary pension systems. Houston added: “Such reforms provide a good roadmap for future policy actions and common-sense fixes.”

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