Outside In | Global pensions crisis only going to get worse
To avoid mass poverty in old age, we must save more, work longer and lower our expectations
When I really want to make myself depressed about the drab state of the global economy and why we are all struggling so hard to hoist ourselves out of the quagmire created in 2008, there is one reliable theme: pensions. Or perhaps I should say the coming pension crisis.
As all those clever people in global financial and banking institutions that are gathered this week in Jackson Hole scratch their heads over why seven years of record-low interest rates – basically free borrowing – has failed to tempt either companies or consumers to borrow or spend, it is the state of the world’s pension schemes that they should think about.
In short, in strict terms, the world’s pension fund managers are in crisis. In the US, the 1,500 company pension schemes that make up the S&P index are underfunded to the sum of US$560 billion. The country’s state and municipal pension schemes are even deeper in debt, with aggregate deficits estimated at US$3.4 trillion. Detroit’s pension scheme went belly-up two years ago, with Alaska, Illinois, California and Connecticut all carrying debts above US$70,000 for every household in the state. The Illinois state pension fund had unfunded liabilities of US$111bn at the turn of the year.
In the UK, the country’s 350 largest companies have assets equivalent to US$950bn, but have payment obligations of US$1.15 trillion. The UK Pension Protection Fund, which was created to bail out the country’s 5,945 pension schemes if they collapse, says 5,020 of its schemes are in deficit and just 925 are in surplus. It says their aggregate deficit is equivalent to US$538bn – but outside experts say the deficit is twice as large.
Other economies are facing a similar crisis. In France, the government’s pension fund liabilities amount to 350 per cent of GDP, while in Germany and the UK they are over 320 per cent. Japan’s public pension liabilities amount to 165 per cent of GDP. Australia is a rarity with liabilities at just 10 per cent of GDP.
Remember that this is the crisis facing the privileged part of the world. And it is the crisis as it has unfolded so far. It is going to get worse, even ignoring the billions of people across the developing world who have yet to discover the luxury of a pension. Various factors make deterioration a certainty: