The $78 Trillion Global Pension Disaster?

Katy Barnato of CNBC reports, Rich countries have a $78 trillion pension problem:

Dreams of lengthy cruises and beach life may be just that, with 20 of the world's biggest countries facing a pension shortfall worth $78 trillion, Citi said in a report sent on Wednesday.

"Social security systems, national pension plans, private sector pensions, and individual retirement accounts are unfunded or underfunded across the globe," pensions and insurance analysts at the bank said in the report.

"Government services, corporate profits, or retirement benefits themselves will have to be reduced to make any part of the system work. This poses an enormous challenge to employers, employees, and policymakers all over the world."

The total value of unfunded or underfunded government pension liabilities for 20 countries belonging to the Organisation for Economic Co-operation and Development (OECD) — a group of largely wealthy countries — is $78 trillion, Citi said. (The countries studied include the U.K., France and Germany, plus several others in western and central Europe, the U.S., Japan, Canada, and Australia.)

The bank added that corporates also failed to consistently meet their pension obligations, with most U.S. and U.K. corporate pensions plans underfunded.

Countries with large public pension systems in Europe appear to have the greatest problem. Citi noted that Germany, France, Italy, the U.K., Portugal and Spain had estimated public sector pension liabilities that topped 300 percent of gross domestic product.

Improvements in health care mean retirees need to string out their income for longer. Meanwhile, the increase in the retirement-age population versus the working population is straining government pension schemes.

Several countries, including the U.K., France and Italy are gradually hiking retirement ages. Citi recommended that governments explicitly link the retirement age to expected longevity.

It also advised that government-funded pensions should serve merely as a "safety net," rather than the prime pension provider, and that corporate pensions should be "opt out" rather than "opt in" to encourage greater enrollment.

No doubt, the world is facing a pension disaster. I'm with Citi until I read that last paragraph about government-funded pensions should serve merely as a "safety net" and that corporate pensions should be "opt out" rather than "opt in" to encourage greater enrollment.

Really? I think Citi needs to tone it down a bit and carefully examine what's working and what's not working around the world. For example, if you look at the 2015 global rankings of top pension systems, you will find Denmark and the Netherlands at the top spot.

I've long argued that countries need to go Dutch on pensions and bolster defined-benefit plans for their citizens. Moreover, I'm a big believer in large, well-governed public defined-benefit plans, much like we have in Canada. Our Top Ten pensions are scouring the globe for investment opportunities and they're able to provide great investment results at a fraction of the cost of mutual funds or other "private sector providers" capitalizing on their size, liquidity and long investment horizon to lower fees by engaging in direct deals wherever they can.

Are Canada's Top Ten perfect? Of course not, nobody is perfect. I've been very careful shining a light on their operations but also praising them for the direct and indirect benefits they provide our economy.

In short, I believe that large, well-governed public defined-benefit plans are a big part of the solution to the global pension crisis. So when Rob Carrick of the Globe and Mail asks, Just how good a deal is the Canada Pension Plan?, I agree with him and think it's a great deal and every Canadian should be demanding enhanced CPP, ignoring the silly and flawed studies of right-wing think tanks questioning the costly CPP.

Of course the CPP is more costly than other large public DB plans, it manages the pensions of all Canadians, but that study from the Fraser Institute is completely flawed and biased. In fact, Keith Ambachtsheer, David Dupont, and Tom Scheibelhut of KPA Advisory put out a note correcting the Fraser's Institute's faulty analysis and conclusions and Jim Keohane, CEO of HOOPP, told me the study "double-counted" the costs of CPP.

The problem is that too many people turn pensions into a political debate between big government versus small government. But as I keep harping, good pension policy is good economic policy which is why I don't have time for idiotic arguments which fail to see the long-term value of large, well-governed public defined-benefit plans.

Having said this, the world needs a reality check when it comes to state pensions.  In particular, in a recent comment of mine, Checkmate for Europe's pensions, I highlighted the pension black hole threatening many European countries. It's not just about raising the retirement age, there's a lot more needed to completely overhaul many European public pensions that are living on borrowed time.

And the situation in the United States isn't much better. Most Americans are ill-prepared for retirement and many underfunded U.S. public pensions are doomed, especially if deflation sets in. And if New Jersey's COLA war spreads to other states, it will spell disaster for many state pension systems.

We need large well-governed public defined-benefit plans, but we also need to introduce risk-sharing at these plans, recognizing that markets aren't always going to deliver the requisite return.

As far as the $78 trillion global pension disaster, I take this figure with a shaker of salt. Politicians and corporations will use it to make the case for weakening defined-benefit plans, replacing them with defined-contribution plans, but that will only exacerbate pension poverty and global deflation.

Don't get me wrong, the world has a huge pension problem. It also has a huge inequality problem fueled by an ongoing jobs and retirement crisis which will only get worse because of aging demographics. The question remains, how are we going to solve these problems?

I recently discussed my thoughts on pensions, inequality and deflation with Gordon T. Long of the Financial Repression Authority. I embedded this interview below once more as I'd like our policymakers to think long and hard about all these issues because they're not going away and will only get worse over the next decade(s).

Also, Charles Millard, Head of Pension Relations & Managing Director for Citigroup, discusses the global pension crisis. As I stated above, I take these figures with a shaker of salt but listen to Charles, he highlights many important issues plaguing U.S. and global public pensions.