Do we need a new social contract for retirement?

By Lucy Dean

June 15 2018
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Nearly half of today’s retirees and workers think future generations will have worse retirements than themselves, a recent report recommending a “new social contract” has found.

Multinational pension and asset management company Aegon’s latest retirement readiness survey found 49 per cent of surveyed retirees and workers predict future generations will have worse retirements.

In Australia, this figure is 44 per cent, with 19 per cent predicting future generations will enjoy better retirements and 27 per cent predicting retirements of a similar quality.

It said the current generation of workers are “losing faith” in retirement systems around the world. It also found that only 7 per cent of workers and retirees think the government shouldn’t do anything to meet the increasing social security needs, and consider the system to remain “perfectly affordable” in the future.

Additionally, only 39 per cent of workers surveyed consider themselves to be “habitual savers” with an eye on retirement.

“In a world where 49 per cent of people believe that future generations will be worse off than those today, there is a compelling case for a new social contract that leaves no one behind,” manager of retirement research at Aegon Mike Mansfield said.

CEO, Alex Wynaendts added, “We need a new social contract for retirement; one in which we, for the first time, truly embrace the economic and social realities of tomorrow.”

Aegon said retirement systems tend to have three pillars, a social security pillar, workplace retirement benefits and personal savings.

It found that Australians rely on social security for 38 per cent of their income, followed by their own savings and investments (36 per cent) and employer contributions (26 per cent).

However, the government and employer contribution pillars around the world are under strain due to ageing populations and changing labour markets.

Aegon said the blows to these aspects of the retirement system reflect a “crumbling” social contract.

“Perhaps the biggest challenge of all is that we need to ensure the long-term sustainability of social security benefits,” Mr Wynaendts said.

“Ultimately this requires governments to make difficult financial decisions and trade-offs, such as reducing retirement benefits, raising taxes or increasing the retirement age.

“What we need is to ensure fairness across generations, reducing the risk of poverty for the elderly now and in the future.”

The report suggested a nine-pronged approach to building a new social contract, which included ensuring social security remains sustainable, incorporating behavioural economics into savings schemes and increased promotion and uptake of guaranteed lifetime products.

Aegon also argued longer working lives and flexible retirements would help workers stay "economically active" for longer and transition into retirement on their own terms. It noted that affordable and accessible healthcare is a crucial pillar of longer working lives.

“Individuals must be able to ask good questions and make informed decisions,” Aegon added.

“Financial literacy must be integrated into educational curriculums so that young people learn the basics of budgeting, investing and managing their savings – skills that can serve them well for the rest of their lives.”

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Retirement