Olivia S. Mitchell is a Professor of insurance/risk management and business economics/policy at the Wharton School of the University of Pennsylvania.
Despite the COVID-19 jump in global mortality rates, rising longevity and falling fertility continue to spur the growth of aging populations in most nations. Accordingly, we must move now to reform retirement systems, if they are to provide secure old-age income for Baby Boomers and their offspring.
Even Before COVID-19, Many Pensions Were Not Sound
My recent review of global pension systems showed that some of the most troubled retirement plans even before the pandemic were traditional defined benefit pensions offered by state/local governments and a shrinking of large corporations around the world. These are in dire straits because plan sponsors have long failed to contribute what they should have, and also because these plans invested in risky assets, leaving them at the mercy of market shocks. Long term low investment returns have also taken a toll.
Defined contribution plans, the engine of growth for pensions in the U.S. and most other developed countries, have fared better in the past decade. Nonetheless, pre-COVID-19, low rates of coverage and contributions were problematic, particularly in developing countries where much of the workforce is informal. And the rise of “gig” work – part-time, self-employment, contract jobs – has also meant rising numbers of workers lack access to firm-based retirement plans.
Yet the biggest problem threatening retirement security around the world is the fact that many national social security systems face near-term insolvency. Pre-crisis, the U.S. Social Security Trustees predicted that system revenues would cover only 75% of scheduled benefits within a dozen years, due to underfunding estimated at $53 trillion in present value.
The Pandemic Made It Worse
While it is premature to provide a forecast about the long-term global economic impact of the COVID-19 pandemic, there is evidence that capital markets may not recover for 40 years. As a result, pension systems cannot expect to earn enough from their (diminished) investments to return to full funding any time soon. Additionally, due to very high unemployment and jobless rates, payrolls shrank and tax collection dropped precipitously. As a result, the U.S. Social Security program’s insolvency may be now occur in just nine years, rather than more than a decade from now as the Trustees projected last year; at that point, benefits to all must be cut by about 25%. In Europe things are not much better: Dutch pension, which had been overfunded at 105%, now have only 70% of the assets needed to cover benefits, likely to result in benefit cuts.
Defined contribution plans have also been challenged in the pandemic. In the U.S., many employers have suspended their matching contributions to workers’ accounts in the interest of maintaining free cash flows. While most firms are likely to reinstate the matches post-pandemic, the lost contributions cannot be recovered. Moreover, several governments have permitted participants to pull out retirement assets early, due to the COVID-19 shock, including the US and Spain. Lawmakers in Chile and Peru have also proposed giving savers early access to their pension assets to help tide them over, and in Australia, politicians asked pension savers to “bail out” struggling local companies. These developments, although politically expedient, bode ill for retirement prospects in our aging economics.
What Can Be Done?
My research and analysis suggests several key areas where retirement systems could use some help. The following suggestions for plan sponsors, governments, employees, and retirees will help us redesign and strengthen resilient retirement systems around the globe:
- We can de-link benefits from individual employers. In many countries including the U.S., people lose their insurance and pension contributions when they lose their jobs. Yet pensions and other benefits could be offered by associations, multiple-employer programs, and workplace platforms, allowing for more worker mobility and continued health insurance when people move between jobs.
- We can offer greater benefits flexibility so that the gig economy can provide all workers the chance to save and insure on flexible, part-time and other on-demand jobs.
- We can encourage delayed retirement where possible. Longer work lives reduce the need to self-fund long retirement periods, and delayed retirement can also be healthier.
- We should generate better quality and more detailed data about mortality and morbidity patterns. These could help insurers seeking to price longevity risk more precisely.
- We can develop a consistent and economically coherent set of guidelines for measuring and forecasting social security as well as pension assets and liabilities, along with long-term care needs of the aging population.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.