x Abu Dhabi, UAEFriday 21 July 2017

Pension woes take shine off golden years

Ageing populations and shrinking birth rates spell trouble for governments around the world that do not have enough cash for their pension funds.

Plans to raise the retirement age and reforms pension schemes sparked massive  protests in France.
Plans to raise the retirement age and reforms pension schemes sparked massive protests in France.

The problem of pensions is global. Few of us can scan the horizon and, without Pinocchio noses, say we aren't concerned about the day we retire.

Governments are concerned too. More and more people are living longer, creating a drain on government-funded pension and old-age schemes. Governments have responded by proposing to raise retirement ages, which has led to protests in some countries. But forcing people to retire at 62, 65 or 69 could lead to unemployment among youth unable to enter a topped-up workforce.

Complicating the issue further has been the global economic crisis. Retirees and those about to retire have seen their private pension funds and investments wiped out, forcing many back to work or to consider working longer.

Today, Weekender takes a snapshot look at several countries around the world, from West to East, North to South, and how they're responding to the retirement and pension crisis.



At the end of last year, the Government announced a 70-per-cent pay rise for its employees. This followed an increase of 70 per cent to benefits packages in 2008. Two years ago, members of the military had their salaries doubled. This was no doubt welcomed by both servicemen and civil servants, but the news was less pleasing to those who have already retired from public service.

"They increased the wages of the people in the service and people due to retire," a former member of the military said, "but they did not increase the salary of people who have been retired."

The UAE military's pension system operates slightly differently than the civilian system. Civil servants can retire at 60 (55 for women) or after 25 years of service, at a maximum of 80 per cent of their monthly salary. In the military, former soldiers are entitled to 100 per cent of their salary after 20 years.

The 62-year-old former member of the military, who did not wish to be named, retired as a general on Dh24,000 a month. What upsets him is that when lieutenants entering the service today eventually retire, they will receive about Dh50,000.

Retired members of the military have made several appeals to the Government, including the prime minister, to have their pensions increased to match the pay rises, but no action has been taken.

Civil pensions, meanwhile, are paid out by pension funds, into which employees pay five per cent of their salary throughout their careers. At the Abu Dhabi Retirement Pensions and Retirement Fund, which controls pensions for nationals employed in the emirate, a payment from the company equal to 15 per cent of the employee's salary is also paid as well as six per cent from the Abu Dhabi Government.

This creates several problems, according to Tarek Coury, an economist at the Dubai School of Government. He has suspicions about the maths in the contribution figures. A payment of five per cent and 15 per cent over 20 to 25 years "should get you through six to seven years of retirement", he said. "Someone is picking up the tab."

This sends a message that has negative implications for Emiratisation. "If your objectives are not just to make sure your population is getting an income, but that your population is being actively involved in their economy and the fate of their country, then that is the wrong kind of incentive."

Also problematic are the high payments required of employers. "You have to be careful about the messages you send to companies. To do it individually like this without thinking more broadly about what are essentially taxes, I think that that would be very bad."

Ultimately, however, the generous pensions drive Emiratis away from the private sector. "You're distorting the market; everyone wants to work in the public sector."

The implications are more than theoretical. The continued preference for public-sector employment or military service are a drain on the nation's mineral wealth. "It's oil money that's paying their salaries; it's oil money that's paying their retirement," he said.

To solve the issue, salaries and pensions must come down to levels near the pay in the private sector. Otherwise, Emiratis will continue to expect high public pay and its generous retirement benefits. Dr Coury does not blame them. "You're earning more than the president of United States to do an admin job."

* Sean McLain



The demonstrators have come and, for the most part, gone. The strikes have subsided, trains are running normally, rebellious students are back in class and queues for petrol are an unhappy memory.

But one traditional ingredient of French protest is missing. For all the sound and fury, there has been no government surrender, in the face of tumult on the street and in the workplace, on bitterly contested reform of the pension system.

France's centre-right president, Nicolas Sarkozy, who promised on entering office in 2007 that he would use his term to introduce long-overdue change, has won his battle.

The unions may declare that the passage through parliament of the new measures, the most important of which raises the official retirement age to 62 from 60, does not end the war; they will seek other ways to challenge what they see as an unjust policy.

But even some key figures of the Socialist opposition, after a degree of wavering, acknowledge that they will be unable to restore the existing pensions system if re-elected to the presidency, with control of parliament, in 2012.

Although French pensions will still be seen as generous when compared with those of neighbouring countries, another element of the changes requires workers who have not completed 41 years of contributions to stay on until 67, instead of 65 as now. This, critics, say, is unfair to women, young people facing years of study before finding employment and those with poor job security.

Despite the impassioned resistance, the reforms were signed into law by the president on November 10.

In the latest day of action, on Tuesday, Mr Sarkozy's opponents mustered less than 50,000 people for street protests compared with up to three million at the height of the revolt. The changes will be implemented gradually before taking full effect in 2020, or 2018 in the case of the higher minimum retirement age of 62.

Bernard Thibault, the leader of the CGT union, warns that enactment of the reform "does not put an end to debate and mobilisation". But the president is equally resolute: the policy, he says, was driven by necessity. Without reform, he said, the pension system was heading for a deficit of €40 billion (Dh196bn).

François Hollande, a possible socialist rival to Mr Sarkozy in 2012, told the left-of-centre Nouvel Observateur magazine the battle had left deep scars. "A majority of the French will hold a grudge against Nicolas Sarkozy not because he has engaged in reform … but because he neither negotiated nor justified. In the end, the feeling of injustice produced a bitterness that is will not go away."

Indeed, there are many who feel that Mr Sarkozy, already unpopular before the pensions crisis and more so now, will pay the price for his victory by being swept from office if he stands for a second term.

But he says the choice facing France was stark: go on paying itself substantially more than it could afford, or accept the pain of radical but unavoidable reform. "With this legislation, our pension system is saved," he said in a statement from the Elysée. "I heard the concerns that were expressed during the debates, and I am fully aware it is a difficult reform. But I always felt my duty, and the government's duty, was to carry it through."

* Colin Randall



Now is not a good time to be growing old in Britain, where the "pensions time bomb" is ticking as loudly as it is in so many other industrialised nations.

Pensions based on a percentage of a person's final salary - regarded as the norm for decades - are becoming a rarity in the private sector as companies face up to the holes opening up in their schemes.

The government, spurred on by the recession and a record budget deficit, is tackling public-sector pensions with the only prospect for millions of workers being larger contributions during their working lives and smaller payouts in their retirement.

The problem is simply one of demographics: the need for the pensions of unprecedented numbers entering retirement to be funded by a diminishing labour pool. The fact that people are living longer only adds to the problem.

Almost one-third of Britons over age 50 have no private pension savings, according to a survey last week by the insurance giant, MetLife Europe - one reason why 20 per cent of those approaching the state retirement age of 65 expect to keep working well into their 70s, according to another survey by the LV insurance firm.

Ray Chinn, head of pensions at LV, said last week: "Britain's over-50s have already slashed their retirement savings by nearly 18 billion pounds [Dh104bn] in the last year, and now it looks like many will have to continue working to ensure they have adequate income in retirement.

"This is not only because there is not enough in their pension pots; nine per cent of over-50s say they need to maintain an income to financially support their children."

The government has now set 2016 as the deadline for all UK businesses, regardless of size, to offer a company pension scheme or to enrol their staff into the new, state-run National Employment Savings Trust.

According to the government, it will mean that between four million and eight million workers will start to save in a pension scheme for the first time.

Lord (John) Hutton, a former Labour government minister, is currently undertaking a review of public sector pensions, which, according to a report last Tuesday from the Pensions Policy Institute, have already been cut in value by 25 per cent to the typical employee.

Those pensions, however, are still seen as more generous than in the private sector and remain based on final salaries.

Lord Hutton has already said that long-term structural reform was needed, sounding the death knell for final salary schemes, which are funded out of contributions made by those still working, replacing them with funded defined contribution schemes where, basically, people get out the returns of what they and the employer have put in.

In the private sector, the position of pension schemes remains volatile and primarily dependent of the movement in the value of shares around the world.

Some 6,653 schemes monitored by the Pension Protection Fund moved from a deficit of £20bn at the end of September to a surplus of £13.5bn at the end of October. Even so, two-thirds of them remained in the red.

* David Sapsted



The United States has the world's biggest government programme to help the elderly but it also suffers from one of the fastest-growing poverty rates and the funding challenges are only going to get bigger.

By 2030, the number of adults 65 or older is expected to jump significantly to 72 million people, up from just over 40 million people this year. Like the rest of the western world, longer lives and a lower birth rate mean there will be more elderly people to look after just as there are fewer people of working age able to pay for them through taxes.

The first of the baby boomers - those born in the demographic boom after the Second World War - turn 65 next year and it is a generation seemingly used to affluence and self-fulfilment. But the "Great Recession" of the past couple of years has put paid to the comfortable retirement so many people were looking forward to.

There is no single retirement age as such in the United States. It has a system complicated by previous reforms to government programmes that take years to come into effect and a push to make more people responsible for funding their own retirement with long-term investments, such as the stock market or real estate, both of which have taken a battering in the past couple of years.

The earliest retirement age with government benefits is 62, the "normal" retirement age recently rose to 66 from 65, and will go up to 67 for those born in 1960 and after. Some analysts have proposed the retirement age should increase to 69.

"People are getting retirement benefits for a decade or so more than when the system was first established [about 50 years ago] because they are living longer and retiring earlier," said Eugene Steuerle, a fellow and expert on retirement issues at the Urban Institute, a non-partisan think tank. "Annually, the federal government spends about $30,000 per household [including benefits and tax credits], but only collects about $20,000 in taxes."

Most Americans hold sacred their so-called entitlement programmes, which were originally conceived as safety nets for the poor and vulnerable during the Great Depression of the 1930s. These include Social Security, which covers retirement and unemployment benefits; Medicare, health care for those 65 and over, and Medicaid, health care for those on low incomes and those needing long-term care.

Social Security is the largest government programme in the world, estimated to keep 40 per cent of all Americans 65 and older out of poverty. Meanwhile, the poverty rate among those 55 to 64 increased to 9.4 per cent last year, according to data recently released by the Census Bureau. The poverty threshold last year was $10,956 for one person.

The opposition Republicans made sweeping gains in congressional elections this month at the expense of the Democrats after promising to cut record deficit and debt levels. But few politicians will come out to promise benefit cuts to the elderly, who are seen as part of an influential and important voting bloc.

"It's crazy but of all the efforts to reduce deficits, the one that least affects the elderly is Social Security reform because it would take decades to come into effect," Mr Steuerle said. "Increases in VAT or cuts to health care are quicker and affect everyone."

* Sharmila Devi



When Canada's finance ministers meet in Kananaskis, in the province of Alberta, next month one topic will be uppermost on many of their minds: how to reform Canada's ageing government-run pension plan.

Everybody agrees there risks being a problem with the Canada Pension Plan as the massive wave of post-war baby boomers reach retirement age. Future retirees are expected to live much longer than their predecessors. When the CPP began in 1966, the average life expectancy for retirees was 78.6 years. Those retiring now can expect to live to 83.9.

Moreover, studies show too many Canadians haven't been putting enough money aside for their retirements and an estimated 11 million Canadians don't have workplace pensions. A recent public opinion poll found that one-third of Canadians do not feel they will have enough money for a comfortable retirement.

The shortfall appears to be particularly acute among middle-class Canadians employed in the private sector.

The problem for the Canadian government is that everybody seems to favour different solutions. When the federal government put out a call to Canadians in May for their opinions, the result was a wide range of proposals.

One idea that doesn't appear to be getting much support is raising the legal retirement age from its current level of 65.

The federal finance minister, Jim Flaherty, has ruled out that option, preferring to work with the provinces on "modest" increases to Canada Pension Plan contributions.

The opposition Liberals are proposing a supplementary, voluntary CPP system to allow workers to top up pension plans. The left-of-centre New Democratic Party supports incentives to encourage those who want to work past age 65 but believes a mandatory move would hurt the poor and manual labourers.

Last month, a Senate committee recommended a new voluntary pension plan.

If Mr Flaherty is going to succeed in reforming the CPP, however, the provinces are the ones he has to persuade. Under Canada's federal system of government, any reform to the CPP needs the agreement of two-thirds of the provinces, representing two-thirds of the country's population.

To prepare for the finance ministers' meeting, two federal-provincial working groups have been set up. One is looking at the idea of enhancing the Canada Pension Plan and raising premiums to fund a modest increase in benefits for retirees. The second group is looking at private-sector options to ensure Canadians have enough income in retirement.

Alberta, which will host the conference, is steadfastly opposed to any increase in CPP premiums, arguing that it would be a job killer. Ontario is reported to be leaning towards an increase in CPP premiums coupled with new programmes such as allowing multiple employers to contribute to an employee's pension plan and to allow the employee to take that pension plan from job to job.

While Mr Flaherty says he is committed to ensuring all Canadians have adequate pension plans, he is also playing down expectations that the federal government alone can solve the problem.

"As we know, the federal government is responsible for only about 10 per cent of the pension plans in Canada," Mr Flaherty told the House of Commons on Tuesday.

* Elizabeth Thompson



India is considering raising the retirement age for its 150,000 central government employees to 62 from 60, a move that could save the exchequer between 150 billion and 200 billion rupees (Dh12bn and Dh16bn).

The allocation for pensions in last year's budget stood at 349.8bn rupees, a hike of 40 per cent over the previous year. The move would also help tame India's spiralling fiscal deficit, which recently touched a 16-year high of 6.9 per cent of the GDP.

If this is implemented, it will be the third hike in the retirement age in India's history, driven primarily by economic compulsions. In 1962, soon after the country emerged from the Indo-China War, which had bled the exchequer dry, prime minister Jawaharlal Nehru increased the retirement age to 58 from 55. Then in 1998, to deal with a spate of crippling sanctions imposed on India in light of its nuclear weapons test, the retirement age was raised again, to 60. The government realised that retirement would cost 52bn rupees as opposed to a substantially lower salaries bill of 14.93bn rupees.

In subsequent years, the pension liability for the central government as a percentage of revenue expenditure has risen to 3.81 per cent in 2008 from 2.91 per cent in 1990.

But the fiscal arguments aside, concerns about a growing elderly population - blessed with a greater life expectancy - also drive the need to raise the retirement age.

Despite India's decelerating birth rate - down to three per family from six in 1950 - the country adds nearly 180 million people to its population every year. At this rate, the United Nations predicts, India will have 1.75 billion people by 2050, eclipsing China as the world's most populous nation. It is a problem that the government describes as a "population growth volcano" waiting to implode.

The number of elderly will grow accordingly: those 60 and over will comprise more than one-fifth of the population, and those 80 and over will make up 15 per cent of the population.

Still, the finance ministry is concerned about the downside of raising the retirement age: it might fuel unemployment, especially among the youth, and cause long delays for those waiting in line for promotions.

But even if the retirement age is hiked, it will only be applicable for employees of the central government. In many states, such as Kerala, the retirement age is 55. Employees in such states demand that their retirement age be brought at par with their counterparts in the central government.

The existing pension system covers only 12 per cent of India's workforce, according to the Asian Development Bank. More than 85 per cent of the workforce is employed in the informal sector, earning less than 3,000 rupees per month, and they do not have access to a formal retirement provisions cover.

The majority depends on voluntary public provident fund schemes or the newly introduced national pension scheme. The latter is a part of pension reforms initiated by the government in 2004 to extend the social security net to a larger number of Indians.

According to the scheme, any recruits in the central government after January 2004 are expected to contribute a nominal part of their salary to build their retirement nest egg. More than 95 per cent of the scheme's subscribers are government employees, but since May last year, the scheme was extended to non-government employees as well.

* Anuj Chopra



With a relatively early retirement age of 55 for women and 60 for men, China has a large and growing population of older people who do not work and, as in Europe, this has sparked debate over whether age limits should be extended.

The authorities are taking notice. Last month Shanghai, where one-fifth of the population is of retirement age, announced that men and women in the private sector would be allowed to extend their careers by five years.

The press has featured "for" and "against" articles about whether the world's most populous nation should raise the retirement age for everyone.

A key pressure in favour of delaying retirement is a pension fund shortfall, reported to have grown to 1.3 trillion yuan (Dh0.71 trillion).

The low birth rate over the past 30 years from the one-child policy has created a four-two-one pyramid, with four grandparents having between them two children, who in turn have just one child together. This, combined with an increase in life expectancy to 73.1 in 2008 from 67.9 in 1981, according to government and World Bank figures, has significantly increased the ratio of old to young in China.

It is set to continue to grow, with the number of people over age 60 predicted to increase to about 400 million in 2050 from 167m now.

Currently, less than 10 per cent of Chinese people are over 65, but by 2030 the figure is expected to be 15 per cent and by 2050 is projected to exceed 20 per cent, according to the United Nations.

China will probably follow the "international trend" by increasing retirement age, said Kam Ping Kwong, an associate professor at City University in Hong Kong who specialises in gerontology. There was, he said, a growing acceptance among employers that older workers offered wisdom and experience that could benefit a company.

"Some have the ability and strength [to keep working]. Why not allow them? Also, the burden on children will decrease," he said.

In the coming decades, China's population of working-age people is set to fall by 10m a year, increasing pressure for a retirement-age increase.

However, many are against this. Chen Xin, a professor at the Chinese Academy of Social Sciences in Beijing, said a "surplus labour" problem meant the authorities were unlikely to keep people working longer.

"We have millions of people waiting for employment. In this case, China first thinks about employment of the younger generation," he said.

Retirees can continue to contribute to society, he said, by looking after grandchildren and doing work informally.

"They still increase the GDP," he said.

However, there is a growing concern that in modern China the tradition of "filial piety", of respecting and caring for elders, is declining, and more old people are being left alone as "empty nesters".

This, coupled with the one-child policy, which means there are fewer children to care for parents, has resulted in more elderly people moving into care homes, and many more of these will be needed as the population continues to age.

* Daniel Bardsley

A look at pension schemes around the world