The Global Retirement Crisis Is Coming for Young and Old Alike

In this Sept. 9, 2013 photo, Dong Linhua, 59, speaks at his home in Shanghai. Dong, a former Shanghai factory worker and now a real estate investor who owns three apartments and two small shop spaces says,

In the prosperous years after World War II, governments in rich countries expanded their pension systems. In addition, companies began to offer pensions that paid employees a guaranteed amount each month in retirement -- so-called defined-benefit pensions.

It got even better in the 1980s. Many countries began to coax older employees out of the workforce to make way for the young. They did so by reducing the age employees became eligible for full government pension benefits. The age fell from 64.3 years in 1949 to 62.4 years in 1999 in the relatively wealthy countries that belong to the Organization for Economic Cooperation and Development.

That created a new, and perhaps unrealistic, "concept of retirement as an extended period of leisure, " Mercer consultant Dreger says. "You'd take long vacations. That was the Golden Age."

Then came the 21st century.

A System Under Siege

As the 2000s dawned, governments -- and companies -- looked at actuarial tables and birth rates and decided they couldn't afford the pensions they'd promised.

People were living longer: The average man in 30 countries the OECD surveyed will live 19 years after retirement. That's up from 13 years in 1958, when many countries were devising their generous pension plans.

The OECD says the average retirement age would have to reach 66 or 67, from 63 now, to "maintain control of the cost of pensions" from longer lifespans.

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 China, the 65-and-older population will rise from 11 percent of the working-age population in 2010 to 42 percent in 2050. In the United States, this old-age dependency ratio will rise from 20 percent to 35 percent.

In response, governments are raising retirement ages and slashing benefits. In 30 OECD countries, the average age at which men can collect full retirement benefits will rise to 64.6 in 2050, from 62.9 in 2010; for women, it will rise from 61.8 to 64.4. Italy is raising the age from 59 to 65.

In the wealthy countries it studied, the OECD found that the pension reforms of the 2000s will cut retirement benefits by an average 20 percent.

Even France, where government pensions have long been generous, has begun modest reforms to reduce costs. France has raised the number of years people must work before they can receive a full pension from 41.5 to 43. More changes are likely coming.

"France is a retirees' paradise now," says Richard Jackson, senior fellow at the Center for Strategic and International Studies. "You're not going to want to retire there in 20 to 25 years."

The fate of government pensions is important because they are the cornerstone of retirement income. Across the 34-country OECD, governments provide 59 percent of retiree income, on average. The government's share ranges as high as 86 percent in Hungary. In the United States, the world's largest economy, it's about 38 percent.

If rich countries don't cut pension costs even more, says Standard & Poor's, a credit-rating agency, their government debt will more than triple as a percentage of annual economic output by 2050. The debt of most countries would drop to what is commonly called junk status.

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 setting money aside for old age. In the U.S., households took on an additional $5.4 trillion in debt -- an increase of 75 percent -- from the start of 2003 until mid-2008, according to the Federal Reserve Bank of New York. The savings rate fell from nearly 13 percent of after-tax income in the early 1980s to 2 percent in 2005.

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.

"People are going to be shocked at how little they have," says Alicia Munnell, director of Boston College's Center for Retirement Research. "For some middle-income people, it will mean canceling the RV" -- the recreational vehicle that has become a symbol of retiree life in America. For those worse off, she says, it could mean an old age in poverty.

After the Financial Crisis, a Long-Term Problem

As if demographics weren't burden enough, the outlook became worse when the global banking system went into a panic in 2008 and tipped the world into the worst recession since the 1930s.

Government budget deficits -- the gap between what governments spend each year and what they collect in taxes -- swelled in Europe and the United States. Tax revenue shrank, and governments pumped money into rescuing their banks and financing unemployment benefits and other welfare programs.

That escalated pressure on governments to reduce spending on pensions or raise revenue. Hungary took one of the most draconian steps: It demanded that its citizens surrender their private retirement accounts to the government or give up their government pensions. Poland seized a portion of private retirement accounts. Ireland imposed an annual tax on retirement accounts.

The Great Recession threw tens of millions of people out of work worldwide. For many who kept their jobs, pay has stagnated the past five years, even as living costs have risen, making it tougher to save for retirement. In addition, government retirement benefits are based on lifetime earnings, and they'll now be lower. The Urban Institute, a think tank in Washington, 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 has depleted her retirement savings trying to stay afloat.

"I don't believe that I will ever retire now," she says.

She also worries about her children, all in their 20s: "I don't think my three sons will ever retire" because pay raises have been so weak for so long.

Less money from a government pension isn't the only factor weighing on future retirees. When the financial crisis struck five years ago, the world's central banks cut interest rates to record lows to stop the economic free-fall. That also punished people with much of their money in investments that pay interest.

"The low-interest rate environment has been brutal," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. She points out that $500,000 in savings would yield $25,000 a year at an interest rate of 5 percent, just $2,500 at 0.5 percent.

The crisis also frightened many away from the stock market. Stocks can be riskier than other investments, but they yield more long term. Many investors have shunned stocks while the world's stock markets have soared. In the United States, the Dow Jones industrial average has risen nearly 150 percent since March 2009. Japan's Nikkei index is up 56 percent just this year.

The past five years have been so tumultuous that some people have been reluctant to invest at all.

Olivia Mitchell, who studies retirement at the University of Pennsylvania's Wharton School, says her grown daughters rebuffed her when she urged them to save more for retirement. Stocks, they said, are too risky. And bonds don't yield enough interest to be worth the bother.

The Asia Challenge

In Asia, workers are facing a different retirement worry, a byproduct of their astonishing economic growth.

Traditionally, Chinese and Koreans could expect their grown children to care for them as they aged. But newly prosperous young people increasingly want to live on their own. They also are more likely to move to distant cities to take jobs, leaving parents behind. Countries like China and South Korea are at an "awkward" stage, says Jackson at the Center for Strategic and International Studies: The old ways are vanishing, but new systems of caring for the aged aren't yet in place.

Yoo Tae-we, 47, a South Korean manager at a trading company that imports semiconductor components, doesn't expect his son to support him as he and his siblings did their parents. "We have to prepare for our own futures rather than depending on our children," he says.

South Korean public pensions pay an average of just $744 a month. South Korea has the rich world's highest poverty rate for the elderly. It has one of the world's highest suicide rates for the aged, too.

China, too, will struggle to finance retirement. China pays generous pensions to civil servants and to urban workers who toiled in inefficient state-owned factories. These workers can retire early with full benefits -- at 60 for men and 50 or 55 for women, depending on their job. Their pensions will prove to be a burden as China ages and each retiree is supported by contributions from fewer workers. The elderly are rapidly becoming a bigger share of China's population because of a policy begun in 1979 and only recently relaxed that limited couples to one child.

The World Bank says the cost of those pensions could eventually reach twice the size of China's annual gross domestic product. That would put the bill at more than $16 trillion.

China is considering raising its retirement ages. But the government would likely meet resistance. "I heard that the authorities might postpone the age of the retirement, but I sure hope not, since I've already worked for almost 42 years," says Dong Linhua, 59, a former Shanghai factory worker and now a real estate investor, who owns three apartments and two small shop spaces.

China also tightly regulates investing, limiting access to assets that are more likely to generate the returns workers need to build a healthy retirement account.

"Things that you and I take for granted, like being able to invest in mutual funds or being able to buy stocks and bonds, are in their infancy in China," says Josef Pilger, leader of Ernst & Young's Asia-Pacific pension practice in Sydney, Australia. "The biggest fear the Chinese regulators have is: What if we relax investment restrictions and we have a financial crisis? People will be on the street, saying: 'You let me play with fire, and I burned my fingers.' "

The End of Traditional Pensions

Governments aren't alone in cutting pensions. Corporations are, too. The traditional defined-benefit pensions they long had provided are vanishing. Companies don't want to bear the risks and costs of guaranteeing employees' pensions. They've moved instead to so-called defined-contribution plans, such as 401(k)s in the U.S., which shift responsibility for retirement savings to employees.

The problem with these plans is that people have proved terrible at taking advantage of and managing them. 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; often buying stocks when times are good and share prices are high and bailing when prices are low. Investment returns from defined-contribution plans are typically 0.76 percentage points lower than returns on defined-benefit plans, according to the consulting firm Towers Watson. That difference adds up: At a 5 percent annual return, $100,000 becomes $432,000 after 30 years. At 5.76 percent, it's 24 percent higher -- $537,000.

Many have raided their retirement accounts to pay bills. In the United States, 26 percent of workers with 401(k) and other defined-contribution plans take loans or make hardship withdrawals before they reach retirement, according to a study by HelloWallet, which offers online services that help people with their finances. Working Americans withdraw $70 billion annually from retirement accounts -- an amount that's 40 percent of the $175 billion put in. Employers add an additional $118 billion.

Retirement specialist Teresa Ghilarducci of the New School for Social Research in New York says the voluntary plans "work for a robot with an Excel spreadsheet," not for people trying to pay bills and care for children who aren't thinking decades ahead to retirement.

Nudging Workers to Save

Several countries are trying to force -- or nudge -- workers to save more for retirement.

Australia went the furthest, the soonest. It passed a law in 1993 that makes retirement savings mandatory. Employers must contribute the equivalent of 9.25 percent of workers' wages to 401(k)-style retirement accounts. (The required contributions will rise to 12 percent by 2020.) Australians can't withdraw money from their accounts before retirement.

When politicians were debating the plan, only about half of Australians supported it. Within six months, approval rose to 85 percent. The difference: Workers started receiving statements that showed retirement savings piling up, says Nick Sherry, who helped design the program as a cabinet minister.

In October 2012, Britain required employers to start automatically enrolling most employees in a pension plan. At the start, contributions must equal at least 2 percent of earnings, half provided by employers. By 2018, contributions must rise to 8 percent, of which 3 percentage points will come from employers.

In 2006, the United States encouraged companies to require employees to opt out of a 401(k) instead of choosing to opt in. That means they start saving for retirement automatically if they make no decision.

Easing the Pain

Rebounding stock prices around the world and a slow rise in housing prices are helping households recover their net worth. In the U.S., retirement accounts -- defined-contribution and defined-benefit plans combined -- hit a record $12.5 trillion the first three months of 2013, according to the Urban Institute. They've gone higher since.

However, net worth is merely climbing toward a level considered inadequate at its peak in 2007. Boston College's Center for Retirement Research says the recovery in housing and stock prices still leaves 50 percent of American households at risk of being unable to maintain their standard of living in retirement. That's down from 53 percent in 2010 but up from 44 percent before the Great Recession hit in 2007.

Only half of all Japanese say they've even thought about how to finance their retirement. And 63 percent are counting on getting most of their income from a government pension system that's going broke.

When they look into the future, retirement experts see more changes in government pensions and longer careers than many workers had expected:

• Pension cuts are likely to hit most retirees but should fall hardest on the wealthy. Governments are likely to spend more on the poorest among the elderly, as well as the oldest, who will be in danger of outliving their savings.

• Those planning to work past 65 can take some comfort knowing they'll be healthier, overall, than older workers in years past. They'll also be doing jobs that aren't as physically demanding. In addition, life expectancy at 65 now stretches well into the 80s for people in the 34 OECD countries, an increase of about five years since the late 1950s.

"My parents retired during the Golden Age of retirement," says Mercer consultant Dreger, 37. "My dad, who is 72, retired at 57. That's not going to happen to somebody in my generation."

McHugh reported from Frankfurt, Germany, Kurtenbach from Tokyo. AP writers Bernard Condon in New York, Fu Ting in Shanghai, Youkyung Lee in Seoul and Sylvie Corbet in Paris contributed to this report.

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January 01 2014 at 12:00 PM Report abuse rate up rate down Reply

January 01 2014 at 11:59 AM Report abuse rate up rate down Reply

So why is not everybody reading my book...Baby Boomer lays out all the issues facing the retiring populations so they won't be such a shock...

December 31 2013 at 10:03 AM Report abuse rate up rate down Reply

As the late "great?" ronald RAY-GUN once said, when you reach a certain age and are no longer able to produce anything, it is your duty as a good American to die!

December 31 2013 at 9:17 AM Report abuse rate up rate down Reply
1 reply to redwingirish's comment

President Ronald Reagan never said that, nor anything to close to it. However, that is the belief of the Obamacare death panel members.

December 31 2013 at 5:40 PM Report abuse rate up rate down Reply

How can you save for your retirement when you live in a republican controlled red state? Ten poorest states are republican.

December 31 2013 at 8:02 AM Report abuse -3 rate up rate down Reply
1 reply to toosmart4u's comment

Hey, Mr. toosmart4u. That's got to be one of the dumbest comments I've heard recently. The primary factor contributing to poverty in states is demographics and has nothing to do with who is running the state. New York may not be one of the ten poorest states, but it's run by the left, one of the most taxed, and people are leaving it, mostly for the south. I'm sure you could much more easily save for retirement in Texas than in New York. You should change your moniker to "tooyoung2Bsmart."

December 31 2013 at 5:48 PM Report abuse rate up rate down Reply

Oooh, oooh, the sky is falling! The sky is falling!. All negative B.S. There are only solutions, not problems.

December 31 2013 at 7:19 AM Report abuse rate up rate down Reply
1 reply to audioknot1's comment

Fairly correct. If you buy things correctly (and just what you need), plan well, and use your head on investing, you can retire without a pension, no SS, etc. I can retire now at age 55 (if I wanted to), my daughter (age 30), may be able to in her late 40's (if she wants to), None have inherited $$, etc, I did not even have matching on my 401k and my wife never worked.

January 01 2014 at 2:18 PM Report abuse rate up rate down Reply

I retired at 57 with a public employee defined benefit pension of $3500 a month. I will be receiving social security this month of $1500 a month. I will try my best to live on $5000 a month. P.S. my employer also pays my medical.

December 30 2013 at 9:01 PM Report abuse -3 rate up rate down Reply
2 replies to steve's comment

That's why the tea party is trying to reign in public employees.

December 30 2013 at 9:03 PM Report abuse +6 rate up rate down Reply
1 reply to scstead's comment

Tea party people are destroying this country!

December 30 2013 at 11:27 PM Report abuse -6 rate up rate down

What a waste of taxpayer money. No wonder this country is in trouble.

December 30 2013 at 9:31 PM Report abuse +4 rate up rate down Reply
1 reply to betty_brock's comment

that is why large corporations did away with defined benefit pensions... so they could stash away trillions of dollars in off shore accounts and let the peons that work for them retire to tent cities in the desert...

December 30 2013 at 9:54 PM Report abuse +5 rate up rate down

I got forced out by my company at age 55 in 1999. However, I was well aware of the possibility since when I was in my early 30's. I studied and invested and did without, as much as possible. I never made more than 60K per year in my life and retired with an investment portfolio and a pension that has enabled my wife and I to live a very comfortable life...and that's with paying over $18K a year for medical insurance for both of us. It can be done but you have to forego the expensive vacations...the new car every 4 yrs..the latest and greatest techno item etc. But the most important thing of all is to learn to invest the right way (no trading) and eliminate all debt by the time you are retired either voluntarily or involuntarily.

December 30 2013 at 7:58 PM Report abuse +2 rate up rate down Reply

The Democrats need to be fired NOW

December 30 2013 at 5:15 PM Report abuse rate up rate down Reply
3 replies to unitedpaintings's comment

Obama, Pelosi, Reid all LIED.

December 30 2013 at 5:09 PM Report abuse +6 rate up rate down Reply
2 replies to jdykbpl45's comment

Those clowns are killing America.

December 30 2013 at 5:13 PM Report abuse +5 rate up rate down Reply

Read above and you will see who lied.

December 30 2013 at 11:32 PM Report abuse +1 rate up rate down Reply