I'm retired - goodbye tension, hello pension! ~Author Unknown
Pension – The very phrase politicians and policy makers alike try to
shun and consider it as the ‘holy cow’ whose reforms would weaken their
political sustenance. Voices calling for its reforms are silenced and
nations live in denial when it comes to facing the reality. The lack of
such proactive action is now manifesting itself and threatens to erode
hard earned wealth of tax payers.
As
we speak, nations are far fetched when it comes to planning for future
pension liabilities. Many governments around the world have advocated
Pay as you go (PAYG) model for social security. Though it works well for
paying present liabilities, such models essentially push nations into
perpetual debt. Factor the U.S.A s’ pension’s model- As per a Bloomberg
estimate, the U.S government faced a planned pension liability of $3
trillions in late 2009 and was short by almost $1 trillion owing to the
financial crisis that engulfed the nation during that time and eroded
asset value. Apart from this, the windfall issuances of ‘Pension bonds’
by institutions after 1997 resulted in a major crunch when redemption of
such bonds were due. According to Mr. David Zion of Credit Suisse
Holdings U.S.A “If the returns of such stressed assets don’t exceed the
cost of raising the bond, the taxpayers ultimately suffer”
So, who is to be blamed for ruining the
poor taxpayer?. The government? The fund managers? The financial
markets? Though it’s fashionable to blame the government, it should also
be remembered that faulty accounting practices that tend to normalize
losses over a longer period of time sugarcoats the bad news and delays
the inevitable. Funds that have been reporting expected revenues of 8%
are now returning only 2-3%. Accounting standards of such funds are
questionable and need monitoring
In a trend not seen in Asian nations, the
U.S pension funds invest up to 60% in equity and rest into bonds, real
estate and less riskier assets. For a country that grows at an annual
rate of 3%, it’s indeed miraculous for a pension fund to return 8%. But
these funds still return 8%. How? The answer lies in ‘Pension obligation
bonds’, bonds that are risk free and are backed by taxpayers’ money
whose very social security is the reason these funds are meant for.
Sounds like whirlpool of debt doesn’t it? Warren
buffet, the billionaire investor from the U.S warned that
over-promising and under performing funds would only lengthen the fuse
of the time bomb and problems would show up in the longer run.
Now let’s compare and see how other
countries fared compared to the U.S model of pensions. Such speculative
practices followed by the U.S were aped by Puerto rico,
a small U.S commonwealth chose to under-fund their pension liabilities.
The nation arbitrarily increased pension payout to 75% of salary from
40%. This resulted in the nation declaring a liability of $12 billions
while having assets worth only $2.3 billions.
Coming closer home, South Asian countries tend to fare better in terms of risk taking and stability of pension numbers. China,
for instance has the highest ‘Pension wealth’ – an indicator of the
asset value with a household that covers future pension requirements.
Following China closely are India, Vietnam, Taiwan, Pakistan, Thailand
and Srilanka. This trend may be attributed to the fact that such
nations have a strong culture of household savings. This can also be
contributed to the fact that India. Philippines, Pakistan and China
lead in ‘replacement rate’- the effectiveness with which a pension
system matches up to the last earnings of the individual. With an
average value of 75%, such nations are safer when compared to the west.
Most of the OECD nations fare very badly
under the same indicators. Most of them have replacement rate of <50%
and ‘Pension wealth’ far less than Asian nations. Could be attributed
to the non-prevalence of a savings culture in those nations and a fully
developed institutionalized social security model
Developing nations are also trying their
desperate best to contain pensions by increasing retirement age and
downplaying mortality numbers. The full effect of demographic overlap is
yet to drag the growth story downwards.
Though there may be reasons to rejoice for countries like India,
one has to understand that we are still a fast developing nation with
never ending needs. It remains to be seen how long are we able to
sustain our savings rate and stay afloat. Our culture of saving for a
rainy day may have helped us tide such a huge crisis so far but only
proactive long term calibrated planning would help avoid a situation
many developed nations are facing.
It’s good to dream of becoming a developed
nation. This dream should not shortchange our future generation by
jeopardizing their tax wealth and compromise their retirement life for
the sake of providing a better today.
Posted 13th July 2011 by Salar
http://salarb.blogspot.in/2011/07/pension-crises-across-nations-where-do.html
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