Changing demographics further support the need for personal responsibility with retirement income planning
by Renee SchaafMs. Schaff is Senior Vice President and Chief Operating Officer, Principal International. Visit www.principal.com
The world is not getting any younger as people globally are living longer. Meanwhile, birth rates are declining and fewer younger workers are entering the workforce. Families and cultures that once relied on younger generations to take care of older generations no longer have this luxury.
As governments around the world, including the United States, prepare for the future, they must think about how best to provide adequate and sustainable pension programs while factoring in dramatic demographic shifts.
Principal Financial Group, a leading, global retirement provider, recently sponsored a report authored by the Global Aging Institute (GAI). The research-based report outlines global best practices for pension plan design keeping these demographic changes in mind. With more than 21 million customers worldwide, Principal is partners with governments around the world to find solutions to address the retirement challenges of the future. Principal’s support of this report, Voluntary Pensions in Emerging Markets: New Strategies for Meeting the Retirement Security Challenge, can assist retirement leaders as they develop real-life solutions to make financial progress possible for millions more people around the world. At the same time, the report recognizes the increased responsibility on the individual to manage their retirement future as more governments are challenged to provide a stable retirement system.
Dramatic Age Shift to Occur in Less than 35 Years
Per the study, the number of citizens age 65 and over will increase by 7% in the United States between 2015 and 2050. This means that the age 65 and over demographic will represent 22% of the total U.S. population within the next 33 years. As dramatic as the increase is domestically, the numbers are even more staggering when you look at countries like Japan that will have 36% of the population over age 65 in the year 2050, and South Korea whose population in the 65+ demographic will increase from 13% to 35% within the same timeframe.
Current Retirement System Challenges
As we all know, rising costs and coverage challenges are already impacting the U.S. system. While Social Security provides a base level of retirement income for millions of people in the U.S., the sustainability of the system is under stress. In 2013, the year for which the most recent data is available, the Old-Age, Survivors, and Disability Insurance (OASDI) Fund collected $851 billion and disbursed $813 billion, resulting in a small surplus. Accumulated trust fund reserves are currently near their peak and will start declining in 2019 with expected depletion by 2034.
Thereafter, tax income would be sufficient to pay only about 79% of scheduled benefits through 2085, at which time benefits will need to be adjusted again. Sustaining the Social Security Program will require raising the Social Security payroll tax, reducing benefits (which may include increasing the retirement age) or a combination of both. Global aging will continue to magnify current problems in the U.S. and further complicate how best to meet the needs of people in retirement.
Enacting Voluntary Savings Programs
However, there are best practices that can be implemented to help make saving easier – no matter what market you are in. The key finding in this report is the importance of voluntary savings programs to help achieve financial security in retirement. Voluntary programs can come in many forms such as employer-sponsored, personal accounts, defined benefit and defined contribution plans.
According to the GAI report, elements of successful voluntary systems include:
- Strong partnerships between lawmakers, employers, providers and advisors. As these groups work together, retirement systems can be designed to increase participation and maximize contribution rates that lead to better retirement outcomes.
- Education and financial literacy. While implementation of the right incentives for employees and employers is certainly a step in the right direction, people need the tools and information to further understand how voluntary products can help lead to a more secure financial future. Advisors will continue to have a critical role in educating individuals about how much money they will need to save for retirement and the risks of relying on the government as the system is stressed.
- Employer involvement. In the U.S., we have made progress to involving employers, but other countries are still learning about the benefits of using existing payroll systems to create efficiencies in the contribution process and lower transaction costs. Additional incentives such as tax benefits and matching contributions from employers can also boost participation and increase employee savings.
- Plan design that leverages human behavior. Solutions such as auto enrollment and auto escalation have dramatically increased participation and individual contribution rates. Policies that are “opt-out” rather than “opt-in” allow individuals to obtain benefits with no effort at all, making them great tools for widespread adoption. Our own studies have shown that 90% of participants stay enrolled when their employer automatically enrolls them. In addition, 80% of participants keep automatic contribution increases when their employer implements it, compared to only 8% who use the feature when they have the option to elect it based on our 2016 data.
- Flexibility in fund selection. Plans should offer both sophisticated investment solutions that allow individuals to explore options such as global diversification that can be used to increase the rate of return for investors, in addition to easy-to-understand outcome-based funds driven by the date of retirement and risk appetite.
While the challenges to long-term retirement savings exist, we believe the solutions are available to help governments, employers and individuals work together toward financial security if we act today. Ensuring retirement security will increasingly depend on building strong and vibrant voluntary, fully funded pension systems to complement government options. To be successful, global policy reform is needed to further incentivize individuals to save more and to support the development of these voluntary savings models. ◊