Golden age of pensions and of risks

OECD in its Pensions Outlook for 2012 made a nice summary by saying that today pensioners are living a golden age – seniors are living longer and their pensions are far bigger than before. However it must be also acknowledged, that the risks today are living their age too, being much more bigger on both sides of demographic and financial trends.

Financial crisis has made a crucial impact on pension funds by squeezing their revenues. Some governments in this turmoil have even stepped back by reducing the incentives to pension savings and instead chosing to rely on budgets which they can control.

But can they indeed, as on the next corner they are facing another challenge of increased sovereign debt, which leaves no or very little margin in budgetary expenditure.

And this is not the end. In parallel, the governments have to meet a demographic challenge of our ageing society. Ones with less employed have to find ways to pay for an increasing number of retirees.

So are there any alternatives? They are. Today we need, more than ever before, an effective savings buffer to counter macroeconomic cycles. And today, more than ever before, we need employment-led growth.

Two things here come obvious. We have rely more on savings by investing in the next generation and we have to recognise that we have to work longer with higher life expectancy.

The pension policies shall go along this path – both by introducing automatic stabilisers linked to life expectancy rate and by adopting the distribution element to the current situation.

Old and rich ‘pay as you go’ pension distribution systems are no longer sustainable with current demographic trend. The governments can no longer afford providing a solid defined pension. Instead, they have to find ways to share the risks and benefits with employed by giving them a choice to fix a share of salary to invest today for the greater benefit in the future.

The people, as well, have to rely more on their actual incomes, what they earn today, and do that up to 67 or even more years instead of 60 (as it was just yesterday). In difficult times they have to rely on their revenues and in this way to support those who cannot do it. The solidarity element comes-in and becomes crucial to the social care provided by the state.

One could note that today governments virtually have become smaller than financial markets. On the other hand one has to recognise that today governments have become far more important by ensuring that this solidarity works, and does it in an environment of confident savings buffer for the next generations to come.

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