Pensions : Falling short

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Extrait de: Falling short, Philip Coggan, The Economist, Apr 7th 2011

People in rich countries are living longer. Without big reforms they will not be able to retire in comfort.

WHEN GERTRUDE JANEWAY died in 2003, she was still getting a monthly cheque for $70 from the Veterans Administration—for a military pension earned by her late husband, John, on the Union side of the American civil war that ended in 1865. The pair had married in 1927, when he was 81 and she was 18. The amount may have been modest but the entitlement spanned three centuries, illustrating just how long pension commitments can last.

A pension promise can be easy to make but expensive to keep

The employers who promised higher pensions in the past knew they would not be in their posts when the bill became due. That made it tempting for them to offer higher pensions rather than better pay. Over the past 15 years the economics of the deal have become clear, initially in the private sector, where pensions (and health-care costs after retirement) were central to the bankruptcy of General Motors and many other firms.

Facile pour un politicien de promettre des retraites dorées sachant qu’il ne sera pas au pouvoir, quand le montant va être dû.

There are big national differences, but in most developed countries the bulk of retirement income (around 60%, according to the OECD) comes from the state. Most countries offer some kind of basic safety net for those who have no other income. In addition to this, they may have a social-insurance scheme to which workers and employers contribute. Despite the insurance label, these are essentially pay-as-you-go (PAYG) systems in which benefits are paid out of current taxes.

En fait, les cotisations que vous payez actuellement servent
à ceux qui non pas assez payés.

In some countries workers also have pension rights that are linked to their employment, whether it is in the public or the private sector. Such schemes can be funded (as in America, Britain and the Netherlands) or unfunded (as in much of Europe). In some cases the state has required such schemes to cover all employees. Australia, for instance, has turned itself into the world’s fourth-largest market for fund management by setting up a compulsory national pension scheme for its 22m people. On top of that, people accumulate savings (sometimes called pensions and sometimes not) that they expect to draw on during their declining years.

The four challenges

Pension provision is higgledy-piggledy and often complex, but most rich countries are having to deal with four main underlying problems. This special report will analyse these in detail and suggest ways of tackling them.

·         The first is that people are living longer, but they are retiring earlier than they were 40 years ago. A higher proportion of their lives is thus spent in retirement.

·         Second, the large generation of baby-boomers (in America, those born between 1946 and 1964) is now retiring. But the following generations are smaller, leaving the children of the boomers with a huge cost burden.

·         Third, some employees have been promised pensions linked to their salaries, known as defined-benefit (DB) schemes. In the 1980s and 1990s the true cost of these promises was hidden by a long bull market in equities. But the past dismal decade for stockmarkets depleted those funds and left employers on the hook for the shortfall. Private-sector employers have largely stopped making such promises to new employees; the public sector is beginning to face the same issues, particularly in Britain and America.

·         Fourth, private-sector employers are now providing pensions in which the payouts are linked to the investment performance of the funds concerned. These defined-contribution (DC) schemes transfer nearly all the risk to the employees. In theory, they can provide an adequate retirement income as long as enough money is paid in, but employees and employers are contributing too little. Both sorts of funded schemes, DB and DC, essentially face the same problem. “The aggregate amount of pension savings is inadequate,” says Roger Urwin of Towers Watson, a consultancy.

Estimating the cost of pension provision has proved enormously difficult. People have consistently lived longer than the actuaries have expected. In 1956 a 60-year-old woman retiring from a job in Britain’s National Health Service had a life expectancy of just under 20 years; by 2010 she could expect to live for another 32 years.

Pensions  Falling short - 1

Paying a pension for longer is much more expensive, particularly if the payout is linked to inflation. The Economist asked MetLife, an insurance company, to calculate what a couple in America would have to spend on an annuity paying out the maximum level of Social Security benefit (the state pension) at age 66: $4,692 a month now and rising in line with inflation. The answer is almost $1.2m.

Politicians tend to underestimate the cost of financing PAYG systems. It is tempting to look simply at the ratio of cash benefits to contributions, rather than allowing for the value of the promises being made to future pensioners.

Facile, pour un politicien de ne pas voir un problème, il suffit
de le pelleter à plus tard

But even on a cash basis, pension finances are deteriorating. In 2010 America’s Social Security system ran a cash deficit for the first time since 1983 as more money was paid out in benefits than was collected in contributions. This happened about six years earlier than expected, thanks to unusually high unemployment.

The immediate cash cost is only part of the problem; the longer-term calculation also involves the value of future pension promises. In bearing that burden, the key figure is the ratio of workers to pensioners, known as the support (or dependency) ratio. This is deteriorating steadily in all rich countries (see chart). As a result, the tax burden is set to rise, at a time when many countries are still struggling to cope with the fiscal deficits left over from the financial crisis.

Il va avoir, de plus en plus de prestataires et de moins en moins de cotisants.

Pensions  Falling short - 2


Pensions  Falling short - 5 - Québec

Pensions paid through a funded scheme do not necessarily work better. Many American states and cities have been underfunding the pension schemes for their employees for years, gambling on the stockmarkets to bail them out. That gamble has failed, and now taxpayers are expected to come to the rescue.

Either taxes must rise or benefits must be cut.

Pensions  Falling short - 3

A cut by another name

The most obvious “cut” is for people to work longer so that pensions are paid over a smaller proportion of their lifetime. In many countries reform attempts have accordingly concentrated on raising the minimum retirement age or increasing the number of years for which an employee has to contribute before qualifying for full benefits. In France a move to raise the minimum retirement age to 62 was accompanied by a phased increase in the minimum level of contributions from 40.5 to 41.5 years, a change that was duly attacked by left-wing commentators as being unfair to unemployed workers, part-timers and students entering the job market late. Italy has gone one stage further: from 2015 on, future changes in the retirement age will be indexed to the rise in life expectancy.

Au Québec, les villes donnent un plein de fonds de pension à 30 ans de service, ou 32 dans le secteur public, ce qui est un non-sens, il risque d’être plus longtemps à la retraite qu’ils ont travaillé, d’où les déficits actuariels et des retraites insolvables.

Nos politiciens n’ont même pas eu le courage de relever le nombre d’années minimum pour avoir un plein fonds de pension, typique de nos politiciens
carriéristes et irresponsables.

Sweden, Germany and Japan already have an automatic balancing system to deal with deteriorating pension finances, largely by making the inflation-linking of benefits less generous. The Netherlands, which has the best-funded (and widely admired) DB pension system in the world, also limits inflation-linking, but delivers pensions that are very close to average earnings. Research by Towers Watson shows that it has a higher ratio of pension assets to GDP than any other country—and it benefits from economies of scale, with pension provision dominated by the giant ABP and PGGM funds. However, contributions are high and the rules on solvency are extremely strict, requiring liabilities to be more than 100% funded.

Pensions  Falling short - 4

Vous remarquez dans le secteur privé en 1979, les régimes à prestations déterminées étaient à 62 %, en 2009 seulement 7 %. Pourquoi ?, parce qu'il savait que ces régimes étaient insolvables, par contre, nos politiciens comme d'habitude toujours aussi irresponsables ont préféré transporter le problème à plus tard.

Pension promises involve a transfer from one generation to another, even when one of those generations is too young to vote. That is true even when schemes are funded, and the money invested in equities and bonds; future workers will have to generate the income needed to pay the dividends on those shares and the interest on that debt.

Pour la paix syndicale, on donne des retraites insolvables sur le dos des futures contribuables, ce qui est tout à fait immoral et illégitime.

That is turning pensions into a battleground, pitting young against old and taxpayers against pensioners. The fiscal crisis has exacerbated the fight. Pension promises made by the government (either to all citizens or to public-sector workers) do not show up in the debt-to-GDP ratios that are used to analyse state finances. Adding them in makes the position look even more alarming. On conservative accounting assumptions, the combined pension deficits of the American states are equal to a quarter of the gross federal debt.

The problem is particularly acute at the level of America’s states because so many of them have balanced-budget amendments. When pension shortfalls require higher contributions, the money must be found from somewhere: higher taxes, less spending on other services or higher contributions from workers (amounting to a pay cut). A further difficulty is that pension rights have been deemed to be legally (and in some cases constitutionally) protected—though some Republican governors have tried to cut unions’ bargaining rights.

Par contre, déjà dans certains États, ont fait des changements majeurs dans les lois pour changer unilatéralement ces privilèges. Car, la population ne veut pas payer pour des retraites dorées quand ceux-ci risque d’être au seuil de pauvreté ou risquer de fermer des écoles ou des hôpitaux, pour satisfaire le simple copinage entre
le pouvoir politique et syndical.

Japan, which started greying earlier than other developed economies, can be viewed as an ominous precedent. Its only advantage in the pensions battle has been that its workers tend to retire later than those in other countries—around a decade after those in France. Nevertheless, the ageing of its population over the past 20 years has been accompanied by deflationary pressures, sluggish economic growth and moribund asset markets. Public spending on pensions has risen by more than 80%. In the corporate sector lax accounting standards disguised the true cost of providing pensions. When the standards were changed, the true horror was revealed: in 2003 the average plan was just 42% funded, so the government had to take over the liabilities of many companies. Even after this rescue, Japan Airlines had to slash pensions by 30% as part of a restructuring plan—a huge blow to pensioners’ standard of living.

Where Japan has led, other ageing economies may follow. This special report will focus on rich countries, where most of the problems arise. The details may differ but the impact of the baby-boomers shows up everywhere; their pensions will be a huge burden on coming generations.

Et préparez-vous d’avoir de sérieux conflits sociaux, où le peuple
refuse de payer de tel privilège.


  1. gravatar

    # by Anonyme - 22 avril 2011 à 15 h 01

    Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!