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Mon May 30 06:46:45 PDT 2005

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GETTING GREYER--AND POORER TOO?
May 30th 2005  

Populations are ageing, in rich and poor countries alike. This means
big trouble for governments, who need to find some way to keep their
retirees out of poverty without breaking the budget

JUST this morning your correspondent plucked out a grey hair, a
development that worries not just her, but her government. As
plummeting birth rates and increasing lifespans rapidly raise the
percentage of oldsters in countries around the world, ageing is
becoming one of the most crucial policy issues of the 21st century.
Those who spent their youth in the 1970s fretting that overpopulation
would drive humanity to extinction may now spend their old age worrying
whether the world has enough young people to support them.

But though the writing has been on the demographic wall for some time,
retirement systems have been slow to adjust. In the rich world,
particularly, pay-as-you-go (PAYGO) pension schemes are in dire fiscal
straits as the ratio of workers to pensioners narrows. In America, for
example, the Social Security system has gone from a worker-to-retiree
ratio of 16-to-1 in 1950 to 3-to-1 today, and is expected to fall to
2-to-1 by 2030--by which point spending on old-age entitlements would
account for two-thirds of the federal budget. The problems in Europe
are even worse, thanks to more generous benefits and birth rates well
below the rate of replacement. By 2030, for instance, Italy is expected
to have a mere 0.7 workers for each retiree--ie, more people collecting
benefit than paying taxes. Other European nations, along with Canada
and Japan, are not far behind.

Perversely, some economists believe that falling birth rates may be a
consequence of government PAYGO schemes. In countries with government
pensions, people can free-ride on the childbearing of others, getting
support in their old age without the wearisome business of changing
nappies and attending school sports days. PAYGO systems also, by
setting a one-size-fits-all retirement age, encourage capable workers
to leave the workforce when they reach that age rather than lose
benefit. And politics makes it hard to raise the retirement age, even
though people are staying healthy longer than ever.

THE PUSH FOR PRIVATE SAVINGS
Britain and America, where much more of the burden of retirement saving
falls on the private sector, seemed to be in better shape than
continental Europe until the collapse of the stockmarket bubble. But
this revealed billion-dollar holes in pension plans on both sides of
the Atlantic, created by a combination of poor management, poor
accounting oversight and the poor incentives of profit-minded managers
who strive to keep company pension funds as lightly funded as possible. 

Corporate pensions also violate a basic rule of good portfolio
management--that your pay cheque and your retirement savings should not
depend on the same company. In America, the Enron employees who
ploughed their savings into company stock learned this lesson
painfully. So, too, have workers at United Airlines: a bankruptcy judge
recently ruled that the firm could hand its pension plan over to the
Pension Benefit Guaranty Corporation, a government-linked pension
insurer that pays only partial benefits to high-earners. This has left
angry workers facing a substantial loss of retirement income.

As caring for retirees becomes more burdensome--General Motors now has
2.5 pensioners for every employee--companies in Britain and America are
increasingly shifting new workers into defined contribution plans, in
which workers can invest a portion of their salary and receive benefits
based on how well those investments perform. Because the contributions
come from the people who will enjoy the benefits in retirement, these
plans are not prone to the same bad incentives that lead politicians to
make their pension plans too generous, or corporations to leave theirs
too spare. They also funnel money into investment, rather than
consumption, as PAYGO plans do, which, by making the economy more
productive, can help ease the burden of paying for retired workers.

But there are downsides too. Individuals can be hit even harder than
companies by bear markets and poor investment choices. And some
workers, particularly in poorer countries, do not make enough to live
comfortably and save for retirement; a defined contribution system will
leave them impecunious in old age. This is what has happened with
mandatory savings schemes in Latin America, which have been a boon to
secure workers but have left the poor, and those in the informal
sector, without an adequate safety net.

Worse, even relatively affluent workers often do not save enough. Over
the past two decades, both household and national savings rates have
declined sharply in the rich world, even as lengthening lifespans have
added new risks to retirement (see chart).

THE FIVE PILLARS OF RETIREMENT INCOME
How, then, to get countries, companies and individuals to save
properly? A 1994 World Bank report, "Averting the Old Age Crisis",
considered that question for the developing world, where retirement
programmes are still largely embryonic. It outlined three "pillars"
underlying an adequate system: a government PAYGO system for basic
income support; a mandatory savings scheme to force workers to invest
some portion of their income; and voluntary savings to augment the
required contributions. Last week, the Bank released a new report that
expands that model to take into account the problems pension reformers
have run into. To the three original pillars, it adds two more: a basic
government pension, not tied to contributions, targeted at the poor and
informal workers; and other sources of support, such as family.

Easier said than done, governments may respond. Even in America, where
incomes are high, taxes low and the pension system spartan, the
administration has run into trouble over its relatively modest scheme
to move part of Social Security from PAYGO to a mandatory savings plan.
Europe, where the fiscal problems are more urgent, has succeeded in
pushing some reforms through, but far more are needed. And for poor
countries with limited resources, early death may still be a bigger
worry than extended life. 

The easiest place to reform, says the World Bank, will be middle-income
countries, where lavish government schemes are less entrenched, but
personal and government income is high enough to fund retirement
savings. It is to be hoped that successful reforms in those countries
could show the way to their richer and poorer brethren--as they already
have in America, where the president's Social Security reforms have
applied lessons learned from personal accounts in countries like Chile. 

But while these reforms will help, they will not solve the problem
unless they attack its root: the increasingly unfavourable ratio of
workers to retirees. If there are too many pensioners and not enough
workers, there will not be enough to go around, no matter how ably it
is distributed. Mandatory savings schemes can help with this problem,
by making it more attractive to stay in work. But governments, too,
will have to start pushing people to stay in the workforce longer. This
means not merely raising the statutory retirement age, possibly to 70
or beyond, but nudging companies to keep older workers in their jobs.
This will not be popular. But every minute they wait, the group of
potentially irate pensioners just grows larger.

See this article with graphics and related items at http://www.economist.com/agenda/displaystory.cfm?story_id=4028271&fsrc=nwl

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