How many people are paying for your retirement? Countries with aging populations are threatened with the very same people who were once means towards their progression. Basically, and over a period of x years; people work and contribute to pension funds that are expected to keep paying them the exact same basic salary that they used to receive up to when they decide to retire. For those who haven’t noticed, the key word in the latter sentence is “basic”. With that said, also note that even the retirement monthly salary is also capped as to not exceed a certain limit. This, for sure; makes it way easier for economists and mathematicians to multiply the number of people expected to retire every year by the monthly retirement salaries they are supposed to get. With the ages of expected retirees known; that shouldn’t be a problem. If countries suffer from an aging population like most EU countries or one that is aging fast like in China; countries look at two options. Being the simplest, “annual inflation-linked pension hike” (Reuters 2012) is removed from calculations to reduce public payout. Being the toughest, minimum retirement age is increased.
There are three factors that need to be looked at when deciding on whether to increase or decrease the minimum retirement age. The first one is the mean age of the population. Because mean values can be quite misguiding; it would be better to look at how many people are expected to retire, and when. The figure that is found will need to be later matched with how many young people are expected to be working and contributing to pension funds. Since the percentage deducted from the salary is in fact humble; countries will need a decent number of young people paying for the monthly salary of one retiree if the traditional public pension scheme is applied. Luckily, most aging populations exist in only a few countries which give pension funds’ managers the freedom to invest and gain on their investments until payments need to be made out of their investment pools. And this goes into a process that has more to do with accounting, i.e.; what is going to be received, what is going to be paid out, and most importantly for both ends of the transaction, when?
The second factor that needs to be accounted for is the unemployment rate. And the relationship is straight forward. The higher the unemployment rate, favorably among young people, the higher the threat is to pension funds and beneficiaries. So Spain, WATCH OUT! Now because the state has to also contribute partially on behalf of its government staff, that sets basis for future trouble. In desperate times, states can definitely tap into pensions by simply not investing them, but they will have some serious problems if they keep doing that. To stay on the safe side, it might be reasonable to increase payout in boom periods to make up for shortfalls in gloomy times. Based on a report by Bloomberg, “New Jersey’s public pension deficit swelled 13 percent to $47.2 billion in fiscal 2012”. This can be explained by a default on pension contribution when cents had to be squeezed out of everyone. The third and last factor is the existing pension gap itself. Have you noticed that a few countries, only a year or so ago, have increased their retirement ages? So no hard feelings but no one on the debit side of your retirement would want you to live for too long.
A report published in The Economist earlier this year describes a model called the “NDC”. The model states that young people keep paying for retirees but part of their payments should also be invested in a separate fund. Upon retirement, the calculation is based on life expectancy and the deductions, paid out to you, are from an account of your accumulated contributions plus interest. So it’s your problem if you live to be a 100 as your retirement funds have been diminishing for 36 years if you had retired at 65. The model proposes a preferable optimal solution to the ones mentioned in the introduction, especially for emerging economies which got the flexibility to set a new system or reform newly established ones. However, and for issues associated with inflation; consider retiring in countries like Ecuador or Panama, or wherever you get a higher purchasing power (InternationalLiving.com 2013). Now the last thought that I want to leave you with is this: what will happen if people decide to go for an early retirement? Hint from Reuters: the public pension deficit of the largest 100 public pension funds stood at $1.2 trillion in October of 2012.
- The writer is a commercial consultant and a commentator on economic affairs. You can follow him on Twitter atwww.twitter.com/aj_alshaali..