Tuesday, November 26, 2013

OECD's Pensions at a Glance 2013

Julian Beltrame of the Canadian Press reports, OECD warns pension safety net fraying as poverty among seniors rises in Canada:
An international think-tank warns that poverty among Canadian seniors is on the rise and that current pension safety nets may be inadequate to address the problem.

For instance, as poverty rates were falling in many OECD countries between 2007 and 2010, in Canada they rose about two percentage points.

As well, the report notes that public (government) transfers to seniors in Canada account for less than 39% of the gross income of Canadian seniors, compared with the OECD average of 59%, meaning more Canadians depend on workplace pensions to bridge the gap.

Meanwhile, public spending on pensions in Canada represents 4.5% of the country’s economic output, compared with and OECD average of 7.8%.

Canadian seniors depend on income from private pensions and other capital for about 42% of their total.

“As private pensions are mainly concentrated among workers with higher earnings, the growing importance of private provision in the next decades may lead to higher income inequality among the elderly,” the report warns.

“Those facing job insecurity and interrupted careers are also more exposed to the risk of poverty because of the lower amounts they can devote to retirement savings.”

The report notes that rising poverty among Canadian seniors, although still relatively low, is most acute among elderly women, especially those who are divorced or separated.

“Higher poverty among older women reflects lower wages, more part-time work and careers gaps during women’s working lives,” the report said while also noting “the effect of longer female life expectancy … for which many women have not been able to save enough.”

The OECD says Canada’s current pension support, both private and public, replaces only about 45% of average pre-retirement gross income, well below the two-thirds that may experts recommend.

Among lower income Canadians, however, the replacement rate is 80%.

Some provinces, particularly Ontario and Prince Edward Island, have been putting pressure on the federal government to move ahead with expanding the Canada Pension Plan which, along with Old Age Security, represents the main source of public transfers to seniors in the country.

But federal Finance Minister Jim Flaherty has so far rejected the approach, saying the economy is not strong enough to withstand the added premiums on firms and individuals expansion would entail.

Last year, the federal government also cut back on the OAS program by raising the age of eligibility to 67 from 65 effective in 2023.

Canada’s approach is not unusual, however. The report notes that following the 2008-09 crisis, pension reform has been widespread throughout the OECD, with many moving to a higher retirement age of 67.

“Some countries have gone even further, moving to 68 or 69 years, though no other country has gone as far as the Czech Republic, which decided on an open-ended increase of the pension age by two months per year,” the OECD adds.

Another innovation being adopted by some countries is tying future benefits with demographic and economic growth projections.

The OECD notes that many if not all countries are facing challenges with aging population, slow economic growth and governmental fiscal concerns.
Elsewhere, Phillip Inman of the Guardian reports, OECD praises UK pension reforms:
Britain has one of the most comprehensive pension reform programmes in the developed world, according to the Organisation for Economic Co-operation and Development.

While other countries have focused on tackling the growing burden of future pension costs by raising the state pension age or improving incentives for older workers to stay in the jobs market, the UK has pursued every avenue to both improve the lives of older people and cut the cost of providing them with a decent income, said the OECD.

The Paris-based organisation said the UK had raised the average incomes of people above the retirement age and introduced plans to expand coverage through the workplace pension savings scheme Nest, which is expected to expand private saving to 10 million more workers over the next three years.

But it said the knock-on effect of policy reforms, many of which protect the benefits accrued by older workers at the expense of young employees, was that in many OECD member countries younger workers were now more at risk of poverty than retirees.

"Pension reforms made during the past two decades lowered the pension promise for workers who enter the labour market today. Working longer may help to make up part of the reductions, but every year of contribution toward future pensions generally results in lower benefits than before the reforms," it said.

"The reduction of old-age poverty has been one of the greatest social policy successes in OECD countries. In 2010, the average poverty rate among the elderly was 12.8%, down from 15.1% in 2007, despite the Great Recession. In many OECD countries, the risk of poverty is higher at younger ages."

The report Pensions at a Glance 2013, says many countries have failed to construct adequate protection for low earners. In the UK, the voluntary Nest scheme, which has proved popular with employees in the small number of companies to use it so far, could leave many people without the top-up retirement provision experts believe will be needed to have a decent standard of living in 20 or 30 years time.

The OECD points out that personal pensions based on stock market returns favoured by British politicians have inherent risks and may fail to deliver adequate returns over the longer term.

It said Poland and Hungary had ditched schemes that rely on stock market returns while the UK, the Czech Republic and Israel have expanded them.

In many countries older workers have come to see their homes as a potential source of income in retirement, whether following a sale or through equity release. The OECD said it was not clear how prevalent or effective housing would be to boost incomes and countries needed to "explore in greater detail how housing and financial wealth can contribute to the adequacy of retirement incomes".

The thinktank also highlighted the benefit of public services to retirees and especially lower income groups. It said governments needed to win public support for public service provision that allows older people to continue working and living a decent life.

"Public support is set to play an increasingly important role in preventing old-age poverty among people requiring health and long-term care services," it said.

On most measures used by the OECD, the UK falls into the bottom half of the table. Public expenditure on pensioner benefits as a proportion of GDP is lower than the average along with pensioner living standards. Italy has the highest spending as a proportion of GDP whereas the Netherlands, which has a large private and workplace pensions top up, has the highest standard of living for retirees.

A rise in the retirement age to 67 in the UK means state expenditure is only expected to increase by 0.5% over the next 40 years to 8.2% of GDP, well below the +295 average of 11.7%.
Of course, while some are praising their reforms, the Express notes that Britain's state pension is one of the worst in the world as Britons on average wages can expect a pension worth just 33 per cent of their final salary when they retire.

You can download the OECD report, Pensions at a Glance 2013, by clicking here. The findings are worrisome for Canada because of the rise in poverty among seniors and the fact that public and private pensions replace about 45% of pre-retirement gross income, well below the two thirds experts recommend.

This report provides more ammunition for politicians warning of Canada's huge pension crisis and puts the pressure on the federal government to wake up and finally start taking pension reforms seriously. Importantly, the time has come to expand the Canada Pension Plan and enhance the retirement security of all Canadians.

Having said this, the OECD report should be taken with a grain of salt. The findings are very similar to those of the Melbourne Mercer Global Pension Index, which compares 20 countries with major retirement schemes. I covered that report in my comment on the world's best pension spots, and blasted it for placing Australia among the top spots to retire (I seriously don't understand why experts are extolling pension lessons from Down Under).

One thing everyone agrees on is the Dutch are way ahead of everyone else when it comes to pensions. Below, as cities and states across the U.S. grapple with their pension programs, PBS travels to one country -- The Netherlands -- that seems to have its pension problem solved. Ninety percent of Dutch workers get pensions, and retirees can expect roughly 70% of their working income paid to them for the rest of their lives.

Olaf Sleijpen of the Central Bank of the Netherlands says "I think what makes it successful is that you basically force people to save for their old age." I agree, and even though Dutch pensions are on the decline, the Netherlands is years ahead of most countries when it comes to ensuring retirement security for most of its citizens.