Preventing pensioner povertyMonday December 21, 2015 Written by Retain Canada
Recent reforms have made pension systems more financially sustainable and pensioners have higher living standards than ever before.
But future generations are likely to find their pension entitlements much less generous than today’s and many may face a serious risk of pensioner poverty, according to a new report from the Organisation for Economic Co-operation and Development (OECD).
Pensions at a Glance 2015 reveals that about half of OECD countries have taken measures in the past two years to make their systems more affordable in the long term. One-third have made efforts to strengthen safety nets and help some vulnerable groups of pensioners.
“Most governments have made important efforts to bring public pension systems on a sustainable path; while these are steps in the right direction, there is now a growing risk in some countries that future pensions will not be sufficient,” said Angel Gurría, OECD secretary-general. “The long-term challenge is to design policies today that are flexible enough to adapt to the uncertainties of tomorrow’s world of work, while ensuring adequate living standards for retirees.”
Retirement ages have risen substantially, with retirement at 67 becoming the new 65 in many countries. Several countries are planning to move towards 70, including the Czech Republic, Denmark, Ireland, Italy and the United Kingdom.
Since the early 2000s, effective retirement ages have continued to increase steadily, especially for women. Employment rates of people aged 55 to 64 years have increased sharply in many countries: from 45 per cent to 66 per cent in Germany; from 31 per cent to 46 per cent in Italy; and from 52 per cent to 57 per cent on average across the OECD.
However, significant challenges remain, with population aging accelerating in many countries partly as a result of changing labour market trends. Many of today’s retirees, or at least men, worked for most of their lives and often did so in rather stable jobs. But a job for life or even an intermittent career might not be the norm for people starting out today.
Unemployment rates, especially among younger people, remain very high in many countries, as do long-term unemployment rates among older workers. A decline in jobs with open-ended contracts and the parallel rise in temporary and often precarious jobs are also reducing the continuity of contributions to pensions that workers can claim in retirement.
Time out of work means time out of the pension system in some countries. As a result, many more people will receive lower pensions when they retire, the OECD reported.
In light of this likely scenario, some countries need to re‑assess their safety nets for pensioners who have not contributed enough for a minimum pension. Across the OECD, these provide 22 per cent of average earnings on average, ranging from six per cent in Korea to 40 per cent in New Zealand. Some OECD countries, such as Chile, Korea, Mexico, Turkey and the United States, combine relatively high risk of pensioner poverty and low benefits, and should consider increasing the value of safety-net payments.
Most countries also index their first-tier pensions to prices, so their value compared to earnings declines over time, as prices tend to increase less than wages. Price indexation is attractive to governments facing budgetary constraints but also runs the risk of fuelling pensioner poverty as safety nets will lose value over time, according to the report.
Pensions at a Glance 2015 also highlights the challenge of the current low-growth, low-interest rate environment for savers and financial service providers offering life insurance and annuities. In addition, the mortality tables used by insurers in many countries do not take fully into account projected improvements in life expectancy. This could lead to pension funds and life insurers seeking higher yields and pursuing riskier investment strategies that could ultimately undermine their solvency. This would in turn jeopardize both current and future retirement income security for many people.
Pensions at Glance 2015 provides comparative indicators on the national pension systems of the 34 OECD countries, including Canada, as well as for Argentina, Brazil, China, India, Indonesia, Russian Federation, Saudi Arabia and South Africa.