The average “Jane” won’t have enough money to maintain her lifestyle in retirement without either working longer, saving more or expecting less. So, how can governments depoliticise the pension debate?
That’s the question Swiss bank, UBS is asking.
In its international pension gap index, UBS compared the pension programs of 12 different countries and found that the average 50-year-old Jane would not be able to rely on any country’s mandatory pension system to fully fund her lifestyle in retirement.
The pension gap – the gap between Jane’s annual income and pension pay-out – is lowest in Switzerland (11 per cent) and highest in Taiwan (157 per cent) while in Australia the gap is 37 per cent.
This means that in order to sustain her lifestyle, Aussie Jane needs to put away 37 per cent of her salary each month in her remaining 10 years or so until retirement.
The bank explained that it used a single woman for its study because women generally live longer and earn less while single retirees have greater expenses than coupled retirees. As such, UBS was modelling a worst-case scenario.
“Overall, substantial progress has been made all over the world to increase universal mandatory pension insurance coverage during the past few decades,” UBS said.
“But as many countries face substantial demographic challenges and an extremely low interest rate environment, further adjustments and in some cases substantial reforms are necessary. Contribution rates need to be carefully calibrated to ensure sufficient pension income in old age.”
Pointing out that since 1950 the rate of workers to retirees in the EU has fallen from nearly seven to just 3.5, UBS said the growing number of older people worldwide, coupled with longer life expectancies means “flexible retirement ages” needs to be considered.
However: “This is only sensible if older generations can be kept in the workforce. This could be facilitated by a flexible or step-wise transition from working to retirement, avoiding the usual full stop.”
UBS explained that when governments and pension plans use life expectancies that are lower than the reality, the resulting “overly generous” payments can deplete funds faster.
“As the number of people leaving the workforce or the ratio between workers and retirees is not constant, one could also think of a dynamic adjustment process,” it proposed.
“Generations that are larger in number could either contribute more, receive less pension or work longer compared to smaller cohorts. Such an auto mechanism would also depoliticise the pension debate.”
The Swiss bank put politicians worldwide on blast for making “promises that can’t be kept”. It said that as politics has a “paramount role” in the way pension systems are regulated, when politicians use the debate “for their own purposes, particularly during elections”, it can add another layer of complexity to the issue.
Such behaviour “makes necessary reforms, such as raising the statutory retirement age or worker contributions, a delicate undertaking”, UBS warned.
Further: “High public debt and the already large outlays governments make to provide pensions reduce their scope to manoeuvre.”
Spotlight on Australia
Aussie Jane can expect about 72 per cent of her income to be replaced by the mandatory pension scheme, made up of both the means-tested age pension and compulsory superannuation system.
Retiring at 67 and with a life expectancy of 88, Jane needs to additionally save about 37 per cent of her salary to fund a retirement lifestyle of a similar quality to her working one.
“This is due to higher living costs relative to wages and higher expected inflation in Sydney,” UBS explained, adding that these factors are mitigated by the “relatively high investment return expected in Australia”.
In Australia, the ratio of working to retired Australians has fallen from more than 7:1 to 4:1 in the last 60 years. Noting this, UBS argued: “It appears the Australian system is more sustainable than others.
“Despite the government-sponsored age pension, public pension spending is fairly low. Given its modest debt-to-GDP ratio, the government has room to manoeuvre.”
At the same time, however, the Australian economy’s dependency on natural resources renders it “vulnerable to price shocks”.
“Further, future superannuation funds might have concentrated positions in the Australian market and could be exposed to domestic shocks, especially in the housing market,” UBS warned.
“It is important to mitigate those risks with an internationally diversified investment approach for private savings.”
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