Here in Canada, Ray Turchansky reports, Financial crisis is putting pressure on an aging workforce:
Speaking at the Bank of England today, Ros Altmann, director-general of the Saga Group, warned that historically low interest rates could lead to another financial crash that would leave pension pots “decimated”.
She explained poor returns were prompting savers to take greater risks with their pensions as they approached retirement.
Savers have seen their rate of returns hit rock bottom as the Bank of England has maintained interest rates at just 0.5 per cent since March 2009.
Dr Altmann said: “Very low interest rates are having a damaging effect on pensions and pensioners.”
She warned of the dangers of rising inflation if interest rates stay too low for too long.
“Pension investors and people buying annuities are being hit by low long-term rates and pensioners suffer from low short-term rates as well, as their savings income having fallen and they cannot make that up.
“In addition, they have been hit by high inflation, so they can no longer protect the value of their capital.
“We already see signs of rising inflation and this has damaged pensioners significantly already. Their savings income has not kept up with inflation, most annuities are being purchased without any inflation protection and a continued increase in inflation will plunge more pensioners into poverty in future.”
An ageing population, with less money to spend, could depress consumption and economic growth, she added.
She called on the Government to take action, suggesting it issues special pensioner bonds that help provide additional income to pensioners caught by the loss of their savings income.
She said the Government could also consider inflation-protection products for pensioners, such as reviving the National Savings products that were recently withdrawn.
Two of the most popular state-backed investment products were withdrawn from the market earlier this year amid the Government’s austerity drive.
National Savings & Investment pulled its inflation beating and fixed interest savings certificates and cut rates on other products.
The group feared demand from consumers could place too high a burden on the taxpayer, at a time when the public finances are under unprecedented strain.
Andrew Hagger, a savings expert at personal finance website at Moneynet, said: “There seems to be no light of the tunnel, with many people having already used up a large proportion of their savings. They are going to get to a stage where there is no where else to turn.”
Robert Bullivant, chief executive of pensions broker Annuity Direct, said: “The only saving grace is the performance of the stock market and so anyone who has stayed in equities will see a larger fund than they did a year ago. But if they have switched to cash, they have not seen much growth. People now need to switch to cash to lock in the stock market gains. If you lose those gains and suffer with low interest rates, it’s a double whammy for pensioners.”
While the financial crisis has forced Canadians to come to grips with the idea that a pension may not be a promise, employee benefits are similarly in peril.
"I find it almost incomprehensible that Nortel LTD (long-term disability) claimants could lose their benefits, but this is possible; let alone losing their health care and a portion of their pensions," said Kevin Dougherty, president of Sun Life Financial Canada, speaking at the Canadian Pension and Benefits Institute conference.
"We saw how benefits and pensions can literally disappear in an instant."
Now people nearing retirement face a new twist.
"Millions of people asked the questions, what if I have to leave the workforce five or 10 years early, or what if I have to stay in the workforce five or 10 years more."
The leading edge of baby boomers will hit age 65 next year, when each day a thousand people in Canada will retire.
"Today with boomers age 50 to 65, with kids grown and many through school, the question they're asking isn't 'what if I die,' it's 'what if I live?' That saps my income and retirement savings. What if I have to live through another financial crisis?"
Dougherty joins federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney in worrying about the growing debt Canadians are piling up.
"How can we be the only place in the developed world where real estate prices continued to increase for the last two-and-a-half years? What does that mean? - more and more debt for Canadians."
While Canadians who can't resist a bargain stock up on moulding empty homes in the United States, there is fear that the Home Equity Line Of Credit or HELOC could do in Canada what subprime mortgages did in the U.S.
Of course, retirement won't affect all people the same.
"Women who are widowed early in retirement actually live three years longer (than those who aren't), and men widowed early in retirement live three years less."
While more and more companies with underfunded pension plans have been reducing benefits and commuted value payouts, the malaise has spread to employment benefits. Many firms offer minimal health-care coverage in retirement or have eliminated it, while more and more current employees find themselves on the hook to find vision and dental insurance.
Meanwhile, the average number of days lost annually to sickness per worker has risen from eight in 1989 to 13 in 2009.
Dougherty's conclusion is that neither government nor lawyers will take care of an aging workforce, "and the next generation of children is not going to want to take care of us."
He said there is more onus on people in the pension and benefits and human resources areas to devise products and provide advice.
"Our industry needs to be much more than just helping to attract and retain employees. The financial security of millions of Canadians depends on the work we do."
One such move is encouraging government to establish a new personal health- savings account.
"We've been advocating something called the registered health savings plan, where people can save money on a pre-tax basis to be used for their health-care costs in retirement. There are other examples like critical illness insurance. But we've got to step up to this. I think this is going to be one of the big areas of the future."
Even with defined contribution pension plans, where investment risk lies with the individual, the employers can provide advice through plan sponsors.
"Narrowing the field from 4,000 fund managers to 12 is providing advice. Overseeing and switching out of managers is providing advice. Setting a level of contribution and matching is providing advice. Providing tools that ask questions and lead people to recommendations is providing advice."
But there is need to help educate people about financial literacy, abetting the federal government's task force on the issue that has been touring Canadians for submissions and will issue a report in December.
"The most striking finding is the degree of the challenge that we have, the surprising lack of financial literacy in the general population is really, really striking," Dougherty said.
"There's a challenge in literacy - reading and writing in English, because we have such large immigration; a challenge in numeracy, lots of people don't like working with numbers; and you layer on top of that the knowledge and skills of financial consequences."
All this is set against a backdrop in which the financial crisis produced severe stock market downturns that scared individuals from investing personally, while corporations were similarly spooked and didn't invest in technology to improve productivity and grow their workforces.
"There was a two-year period in which we didn't invest, and that's going to hurt us for two to five years," said Glen Hodgson, chief economist of the Conference Board of Canada. "Health care will soon emerge as a top concern for Canadians. Aging is going to suck the life out of our economy slowly."
But just as baby boomers were told 40 years ago that the investment of the future would be "plastics," Hodgson has his own tip: "India will be the next China, it will keep growing at eight per cent for a number of years."
You can bet your hip replacement on it.
Finally, my favorite deflationist, Gary Shilling was interviewed on Yahoo's Tech Ticker on Monday warning us that the age of deleveraging is upon us:
The key to understanding the difference between today's economic weakness and normal economic weakness, Gary says, is to look at the past 30 years.
Beginning in 1982, Americans spent their way to apparent prosperity. Savings rates plummeted, as consumers spent almost everything they earned. Home equity withdrawals soared, as consumers realized they could use their rapidly appreciating houses as personal ATM machines. And, across the economy, total debt surged to a previously unheard-of 375% of GDP.
But now all those forces have reversed. Savings rates are climbing again, as consumers realize they have almost nothing left to retire on. Home equity withdrawals have ceased, because house prices have stopped appreciating and started falling (Gary thinks they'll fall another 20%). And consumers are looking at ways to reduce their debts, not borrow more money.
These trends will continue for at least another decade, Gary Shilling thinks. He lays out this theory in his new book, "The Age Of Deleveraging."
The economy will grow in the next decade, Gary says, but it will grow much more slowly than it has grown in the past. Unemployment will remain high. Consumers will continue to be forced to embrace a new frugality. And no matter how cheap the Fed makes money, overall borrowing will continue to decrease.
In the process of this, stocks will do poorly. House prices will fall another 20%. Only Treasury bonds will do well.
Only Treasury bonds will do well? I'm not as sure as Mr. Shilling about bonds, but you can listen to the interview below and make up your own mind.
One thing I'm sure of is we're well on our way towards widespread pension poverty. These markets are brutal even for the best money managers. And we expect individuals to take care of their investments and save enough to enjoy a decent retirement? Good luck, this mess is going to end up costing taxpayers billions in healthcare and social costs. Unfortunately, policymakers have yet to grasp the long-term implications of pension poverty. When they do wake up, it's going to be too late.