Millions of workers who think pensions will secure their future could find themselves facing poverty in retirement.
In particular, the Australian federal government admitted in March 2013 that their unfunded superannuation liability for politicians, judges, public servants and military personnel is $200 billion and increasing.
An unfunded liability is one that does not have the savings set aside to pay for it. This shortfall is estimated to be more than 2.5 times the assets in the Future Fund that was set up by the Howard government to help fund these liabilities. An even more serious problem is that the outstanding liabilities are growing much faster than the economy.
Compared with the cost of private annuities, all Australian government pension funds represent open-ended cheque books written by the taxpayer. But this problem is not limited to government employees; it extends to the pensions the government is expected to pay all citizens once they reach retirement age. How can they pay pensions when they don’t have the money?
Our government has underestimated how quickly average lifespans are rising – and this is not a problem unique to Australia. Ageing societies and serious deficits have also been identified in the US, UK, Europe and Asia.
So what can be done to prevent the looming pensions crisis?
The Organisation for Economic Co-operation and Development (OECD) has been researching exactly this, and say that extending working lives provides the basis of necessary social reform to address this crisis. They say if nothing is done quickly to extend working lives, living standards will fall in the course of coming decades.
We know, because of the ageing of our populations, that there will be fewer and fewer persons of working age to support more and more older people. For the OECD as a whole, the dependence ratio of older people (those aged 65 and over as a proportion of those aged 20-64) will rise from the current figure of 22%, to 46% in 2050. In these circumstances, the OECD says it is essential to have as many people working as possible – young people, women and especially older workers.
Most countries have considerable room to increase the employment rate of persons between age 55 and 64. The average rate in the OECD is currently 48% – varying from 25% or less in France and Belgium, to 70% in Switzerland.
They also recommend that governments eliminate provisions that subsidise early withdrawal from active life – first and foremost, early retirement schemes. Some countries have already taken that step, but experience shows that it is not enough. In many cases, the actual retirement age remains two to three years below the statutory retirement age, because other provisions continue to encourage people to stop working.
In Austria, for example, one man out of two leaves the labour market with a disability pension. Sweden is currently experiencing a sharp increase in the number of older workers on long-term sick leave. Elsewhere, in places such as France and Belgium, the entitlement to unemployment benefit without any obligation to search actively for a new job means that older individuals can sometimes shift directly from unemployment into retirement.
While it is desirable for older workers to remain in the labour market, the OECD highlights that steps must be taken to ensure they have real employment prospects. Their jobs must be of sufficient quality to encourage them to stay on for an extended period. This requires a veritable change in attitude on the part of all concerned.
Governments are also encouraged to adapt their employment policies. Public employment services must meet the specific needs of older workers and measures that reduce benefit dependency, and they should facilitate the integration of older workers in the labour market.
They go on to say that companies must learn to view older workers as a genuine asset. They will need to eliminate discrimination against older workers, invest in their training, and adapt working hours and conditions to fit their needs.
Lastly, workers must also understand that early retirement is not a vested right and that they must get used to the idea of a longer career, perhaps taking on different jobs towards the end of their working lives.
Clearly, the issues of demography and older workers go well beyond the reform of pension systems. They are a matter of social equity, not only between workers and pensioners, but also between generations.
Without reform and a change in attitude, it will be our children and grandchildren who will pay the price.
Moneylogue 