and Elaine Kurtenbach
A global retirement crisis is bearing down on workers of all ages.
Spawned years before the Great Recession and the 2008 financial meltdown, the crisis was significantly worsened by those twin traumas. It will play out for decades, and its consequences will be far-reaching.
Many people will be forced to work well past the traditional retirement age of 65. Living standards will fall and poverty rates will rise for the elderly in wealthy countries that built safety nets for seniors after World War II. In developing countries, people’s rising expectations will be frustrated if governments can’t afford retirement systems to replace the tradition of children caring for aging parents.
The problems are emerging as the generation born after World War II moves into retirement.
“The first wave of under-prepared workers is going to try to go into retirement and will find they can’t afford to do so,” says Norman Dreger, a retirement specialist with the consulting firm Mercer in Frankfurt, Germany.
The crisis is a convergence of three factors:
•?Countries are slashing retirement benefits and raising the age to start collecting them. These countries are awash in debt since the recession hit. And they face a demographics disaster as retirees live longer and falling birth rates mean there will be fewer workers to support them.
•?Companies have eliminated traditional pension plans that guaranteed employees a monthly check in retirement.
•?Individuals spent freely and failed to save before the recession and saw much of their wealth disappear once it hit.
Those factors have been documented individually. What is less appreciated is their combined ferocity and global scope.
“Most countries are not ready to meet what is sure to be one of the defining challenges of the 21st century,” the Center for Strategic and International Studies in Washington concludes.
Effects of pay cuts
The Great Recession threw tens of millions out of work worldwide. For others, pay stagnated, making it harder to save. Because government retirement benefits are based on lifetime earnings, they’ll now be lower. The Urban Institute, a Washington think tank, estimates that lost wages and pay raises will shrink the typical American worker’s income at age 70 by 4 percent — an average of $2,300 a year.
Leslie Lynch, 52, of Glastonbury, Conn., had $30,000 in her 401(k) retirement account when she lost her $65,000-a-year job last year at an insurance company. She’d worked there 28 years. She’s depleted her retirement savings trying to stay afloat.
“I don’t believe that I will ever retire now,” she says.
Mikio Fukushima, who is 52 and lives in Tokyo, worries that he might need to move somewhere cheaper, maybe Malaysia, after age 70 to get by comfortably on income from his investments and a public pension of just $10,000 a year.
People like Fukushima who are fretting over their retirement prospects stand in contrast to many who are already retired. Many workers were recipients of generous corporate pensions and government benefits that had yet to be cut.
Jean-Pierre Bigand, 66, retired Sept. 1, in time to enjoy all the perks of a retirement system in France that’s now in peril. Bigand lives in the countryside outside the city of Rouen in Normandy. He has a second home in Provence. He’s just taken a vacation on Oleron Island off the Atlantic coast and is planning a five-week trip to Guadeloupe.
“Travel is our biggest expense,” he says.
Falling birth rates
Compounding the problem is that birth rates are falling just as the bulge of people born in developed countries after World War II retires.
Populations are aging rapidly as a result. The higher the percentage of older people, the harder it is for a country to finance its pension system because relatively fewer younger workers are paying taxes.
In response, governments are raising retirement ages and slashing benefits.
Many of those facing a financial squeeze in retirement can look to themselves for part of the blame.
They spent many years before the Great Recession borrowing and spending instead of saving.
The National Institute on Retirement Security estimates that Americans are at least $6.8 trillion short of what they need to have saved for a comfortable retirement. For those 55 to 64, the shortfall comes to $113,000 per household.
Corporations, too, are cutting pension costs by eliminating traditional defined-benefit plans. They don’t want to bear the cost of guaranteeing employees’ pensions.
They’ve moved instead to so-called defined-contribution plans, such as 401(k)s, in the United States.
These plans shift responsibility for saving to employees.
But people have proved terrible at taking advantage of these plans. They don’t always enroll. They don’t contribute enough. They dip into the accounts when they need money.
They also make bad investment choices — buying stocks when times are good and share prices are high and bailing when prices are low.