Monday, June 22, 2009

OECD on pensions in crisis

Fiona Stewart writes for the OECD Observer on where pensions policy should move in the wake of recent stock market declines:

Unfortunately, this meant that the financial turmoil and ensuing economic crisis has had a major impact on private pension assets-OECD estimates that these have plummeted by US$5.4 trillion globally, 20% of their value. Countries where pension funds were heavily invested in equities, such as Ireland and the US, faced the heaviest blows. No wonder confidence in private savings is being sorely tested and there are calls to return to what is seen as the "safe haven" of government pensions.

Yet there are many problems and dangers with making such a reverse turn. First it should be noted that pensions are long- term investments, and we should not make decisions affecting decades based on one year's results. Unlike the problems in the banking and insurance sectors, the decline in pension assets does not have short-term implications for most of us, and should recover over time. Indeed, despite recessions and bursting bubbles, over the last few decades balanced portfolios in OECD countries have earned an average 7% per year in real terms.

Even if we do find it hard to trust markets again, huddling back under the shelter of public pensions is not an option. For one thing, public pensions have also been impacted by the crisis, as unemployment rises and tax takes decline, reducing contributions to the system and adding to already stretched government deficits.

Another key reason is the cost pressures arising from an ageing society, as the disproportionate ratio of retirees to workers will continue to strain government budgets. When most of these pension systems were introduced the retirement age was 65. But then, life expectancy was also 65. Now we might work for 30 years and be retired for 30 years. Public pensions alone are no longer the answer, and for most countries a mix of both public and private pension schemes is probably where the future lies-security through diversity is the key.

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