|Pension crises across nations. Where do we stand?|
Contributing Editor, TradeBriefs: Salar Mohamed BijiliI'm retired - goodbye tension, hello pension! ~Author Unknown
Pension - The very phrase politicians and policy makers alike try to shun and consider it as the 'holy cow' whose reforms would weaken their political sustenance. Voices calling for its reforms are silenced and nations live in denial when it comes to facing the reality. The lack of such proactive action is now manifesting itself and threatens to erode hard earned wealth of tax payers
As we speak, nations are far fetched when it comes to planning for future pension liabilities. Many governments around the world have advocated Pay as you go (PAYG) model for social security. Though it works well for paying present liabilities, such models essentially push nations into perpetual debt. Factor the U.S.A s' pension's model- As per a Bloomberg estimate, the U.S government faced a planned pension liability of $3 trillions in late 2009 and was short by almost $1 trillion owing to the financial crisis that engulfed the nation during that time and eroded asset value. Apart from this, the windfall issuances of 'Pension bonds' by institutions after 1997 resulted in a major crunch when redemption of such bonds were due. According to Mr. David Zion of Credit Suisse Holdings U.S.A "If the returns of such stressed assets don't exceed the cost of raising the bond, the taxpayers ultimately suffer"
So, who is to be blamed for ruining the poor taxpayer?. The government? The fund managers? The financial markets? Though it's fashionable to blame the government, it should also be remembered that faulty accounting practices that tend to normalize losses over a longer period of time sugarcoats the bad news and delays the inevitable. Funds that have been reporting expected revenues of 8% are now returning only 2-3%. Accounting standards of such funds are questionable and need monitoring
In a trend not seen in Asian nations, the U.S pension funds invest up to 60% in equity and rest into bonds, real estate and less riskier assets. For a country that grows at an annual rate of 3%, it's indeed miraculous for a pension fund to return 8%. But these funds still return 8%. How? The answer lies in 'Pension obligation bonds', bonds that are risk free and are backed by taxpayers' money whose very social security is the reason these funds are meant for. Sounds like whirlpool of debt doesn't it? Warren buffet, the billionaire investor from the U.S warned that over-promising and under performing funds would only lengthen the fuse of the time bomb and problems would show up in the longer run.
Now let's compare and see how other countries fared compared to the U.S model of pensions. Such speculative practices followed by the U.S were aped by Puerto rico, a small U.S commonwealth chose to under-fund their pension liabilities. The nation arbitrarily increased pension payout to 75% of salary from 40%. This resulted in the nation declaring a liability of $12 billions while having assets worth only $2.3 billions.
Coming closer home, South Asian countries tend to fare better in terms of risk taking and stability of pension numbers. China, for instance has the highest 'Pension wealth' - an indicator of the asset value with a household that covers future pension requirements. Following China closely are India, Vietnam, Taiwan, Pakistan, Thailand and Srilanka. This trend may be attributed to the fact that such nations have a strong culture of household savings. This can also be contributed to the fact that India. Philippines, Pakistan and China lead in 'replacement rate'- the effectiveness with which a pension system matches up to the last earnings of the individual. With an average value of 75%, such nations are safer when compared to the west.
Most of the OECD nations fare very badly under the same indicators. Most of them have replacement rate of <50% and 'Pension wealth' far less than Asian nations. Could be attributed to the non-prevalence of a savings culture in those nations and a fully developed institutionalized social security model
Developing nations are also trying their desperate best to contain pensions by increasing retirement age and downplaying mortality numbers. The full effect of demographic overlap is yet to drag the growth story downwards.
Though there may be reasons to rejoice for countries like India, one has to understand that we are still a fast developing nation with never ending needs. It remains to be seen how long are we able to sustain our savings rate and stay afloat. Our culture of saving for a rainy day may have helped us tide such a huge crisis so far but only proactive long term calibrated planning would help avoid a situation many developed nations are facing.
It's good to dream of becoming a developed nation. This dream should not shortchange our future generation by jeopardizing their tax wealth and compromise their retirement life for the sake of providing a better today.