Ask any Millennial what they’ll live on when they retire, and they’ll look at you with a blank stare. First off, they are young (oldest are 35), so age 65 seems a lifetime away. Secondly, most of them are occupied with just getting by, an outcome of living in the gig economy, in which saving is unlikely. And we (the Silent generation and older Boomers), were like that too—someone out there would look out for us, things would turn out. Furthermore, most of them are convinced that retirement with a pension is a thing of the past.
They could be right—a guaranteed pension used to be the expectation not so long ago. But after 2000, pension systems began to erode, —and now a funded retirement is more the exception than the rule. It’s ironic that this worldwide trend has appeared just as life expectancy is increasing.
A look at Life Expectancy
In the US:
Over the course of the 24 years spanned by this study, life expectancy increased by 5.3 years nationwide, from 73.8 to 79.1. Women (whose lifespan increased from 77.5 to 81.5) lived longer than men, but both sexes saw improvements.
Canadian provinces, British Columbia (82.2 years) and Ontario score “A” grades on life expectancy, placing them among the top five.
Switzerland, Japan, and France led the world in this 2011 study, Switzerland (82.8 years) and Japan (82.7 years).
These are wonderful statistics, and will only improve. The question now is, how will this long retirement be funded?
A look at some pension plans:
Revisiting the Defined Benefits Plan (for old time’s sake)
If the plan is a DB Plan, upon retiring employees will receive the specified monthly amount for the rest of their lives. These plans usually allow for inflation, and continue to their spouse or common law partner after they die. These plans are guaranteed, and recipients need never be concerned with the status of their investments.
The Defined Contribution Plan, the employee, not the employer takes the risk. If they have been part of a DC Plan, at retirement they will receive all of the funds which they have contributed, those which their employer has contributed, as well as all accumulated investment income. But at retirement, everything changes.
The employee can choose to transfer the DC Plan funds to a locked-in RRSP, a Life Income Fund (LIF) or an annuity, the important issue being that they will be managing their own asset allocation, and the employer will no longer be involved. Income is based on how the investments perform, and is not guaranteed.
In the past, (1992), 85% of people with a pension were DB Plan members while 15% had Defined Contribution or other types of plans. The percent covered by DB Plans fell to 77% by 2008, and rose to 23% for DC Plans. While the public sector coverage has not changed very much, the private sector shows a significant shift towards Defined Contribution Plans.
Corporate America and financial innovators, notably proponents of mutual fund 401(k) industries, are behind the three decades move from DB to DC pensions. They have pressured employees to save thousands, even millions—witness the laughable 1980s slogan, “Freedom 55”.
Defined contribution plans have failed.
Today, many Boomers facing the end of their work lives do not have enough saved, and are at the risk of having an inadequate retirement, or not being able to retire at all.
This stunning development has happened fast, and has taken us all by surprise.
Barbara A. Friedberg, writing for Investopedia, says this:
“Boomers born between 1946 and 1964, are heading into retirement in droves (about 10,000 a day, in fact). Along with the aging of this iconic cohort come lots of data about their poor preparation for their later years. Insufficient preparedness and lack of financial resources for decades without steady employment paint a gloomy picture for many retirees.”
Are things any better worldwide?
Space in this article does not allow a comprehensive analysis of pension systems worldwide. But the respected 2014 Melbourne Mercer Global Pension Index might at least give us an idea of how various countries rank in pension quality. The Index compared the pension systems of 25 countries across the Americas, Europe and the Asia-Pacific, based on each system’s adequacy, sustainability and integrity.
In this study, Australia, Switzerland, Netherlands, Sweden and Canada ranked highest.The United States ranked 57.9 putting it in 13th place out of 25 countries, below Ireland and above France.
Retirees in countries placing lower in the scale will be vulnerable, and will most likely have inadequate incomes. It is no wonder Generation X is losing hope of a plausible retirement, and Millennials believe they may not be able to retire at all.
What can retirees do now?
The alternatives to a guaranteed or otherwise adequate retirement pension are few, and include
1. contracting out to your old job
2. finding a new, usually lower paying job
3. joining the ranks of the entrepreneurs
4. living on your savings until old age benefits kick in
I suspect that the feelings about all of these alternatives are ambivalent at best, although the following links present a more positive picture:
All of society will feel the sting when older people aren’t able to retire with dignity and security.