Europe's pensions challenge

@wunala

Try looking outside Melbourne for a job. Get a promotion or take a second job specifically to get ahead on your mortgage. The solution is up to you. You live in a land of opportunity.

Pensions are one of the two "budget time bombs".
The other budget time bomb is paying for pensioner health care.
Personal savings and investments, including in children, are essential prudential management.
Fewer children, fewer future taxpayers, smaller pensions.
SEE http://ppplusofonia.blogspot.com/2010/02/your-budget-or-mine.html
PPP Lusofonia

Kouroi,

Please don't rub it in my face...

Hey, at least Montréal went to the Conference Finals this year. Like Vancouver... Wait. What? Oh, sorry.

:)

Wunala,

At least Canada has trees that grow back after they are cut and quite an abundant supply of water.

@ramirez1951,

Prosperity fuelled by massive private debt and zero industry besides digging holes is unsustainable. The problem with "unsustainable" is that it does not give timeframes for the day of reckoning.

:)

@Wunala
I confess that for me, an italian, to read your words
about Australia sounds strange.
We have a view of Australia as a rich, prosperous
Country, Isn't it ?

A ridiculous article in good Economist tradition.

So, "money works"? And insurance companies provide us with extra profits just because they are so good to us? Is that really the truth?

Or isn't it that insurance companies grab for our money so they can siphon off mega-super-bonuses for their "top" employees, create an economic mess worldwide, and leave their customers with negative ROI?

The Economist has finally uncovered its true stipulation: advertising money-wasting schemes. Because who pays the ads in your "magazine"?

Jaime Lannister,

I do not suggest an "alternative" to compulsory super contribution. I suggest that it should be supported by some form of tax-based contribution that ensures a semi-decent living in (what will prove to be a very short) retirement to the rest of us Y-geners who will not inherit wealth (and a small house qualifies as "wealth" in my dictionary) from their parents.

Instead of the government sending me a cheque for nearly $7,000 in "excess taxes paid" like they did last year, I would prefer they keep it and build some semblance of social safety net with it. $7,000?!?! Out of a gross income of $65k??? Basically I got half of my taxes back. What kind of system is that? And I am sure there are quite a few people like me, so it is starting to be a lot of money that the government takes, only to give back a few weeks later. If you take it, use it. I don't want a flat-screen TV or a Wii or stainless-steel kitchen appliances, so I have no use for Kevin Rudd's bonus or the ATO's money. I am thrifty, and proudly so.

But I would like to have more than $4.60 left on my bank account at the end of a pay period if I have had to go to the doctor's (and yes, I also have private health insurance at $130 a month on top of Medicare). It looks like this is difficult on a single income in Melbourne.

So while I am more than aware of the arithmetical dead-ends created by systems such as France's, I would like to see something of a middle-of-the-road system emerge from our world-wide comparisons. The Scandinavians seem to manage pretty well, with high taxes, but also the highest levels of human development, comparatively low public and private debt, and thriving, innovative universities and private sector corporations, of all sizes.

Perhaps something we should look at more closely, instead of bitching and moaning about a mining "super tax".

:)

How come accumulation of financial claims now can avert pension crisis due to population age structure in the future? Can an IOU replace a working age individual? It's interesting that finance guys think (or try to make us think) that financial claims have life and value of their own. They are derivatives on the underlying economy (and demography). If production capacity is not there purchasing power of these financial claims will go down. More so as retirees will be exchanging these claims for real good and services and there would be shortage of those willing to provide them and in exchange to accept those financial claims.

Here one of my final essay examns for my Political Economy Class, I hope you enjoy it !! I know is only the American Perspective but ultimately it has the reason why government it is more effective than private insurance on pension plans!!

Throughout its years of life, Social Security has served as an example of what a good policy should be like. When President Roosevelt opted to create Social Security, he was conscious of the main objective; provide income security when needed, regardless of an individual’s social status. The effectiveness of this system is undoubtedly well known. The idea initially intended to provide coverage for elderly people. However, throughout the years, arrangements have led to including more beneficiaries, dependents and disabled workers.
Even though no financial issue has led to a struggle with the Social Security system presently, it is only a matter of time for this to happen. In fact, it would be impossible to keep such systems, such as Social Security and Medicare, operating with no funds available. However, the coming dilemma, threatening the Social Security system future to address every citizens needs’, could be resolved. Thus, some actions to anticipate the financial “crisis” that approaches in the future would be necessary. Any action taken, though, must be to guarantee the privileges provided by Social Security for future generations. Undermining the efficiency of the program is prohibited, because such thing is not debatable.
The Social Security system will imminently face financial struggles. This does not mean that it is facing these financial shortages in the present. As Altman states, all the hype is a fake propaganda set up around the system. The main reason for this dishonest propaganda towards the Social Security system has been ideological. Ultimately, the goal is to sell, what is probably the most prestigious U.S. public program, turning Social Security into a private and profitable business, just like the health care system. George W. Bush’s plan to privatize Social Security was part of this propaganda.
There are no fundamental reasons to support Bush’s proposal to bring down Social Security. Doing so would represent giving up the American common wealth. In addition, a possible dissolution of the system would abruptly leave millions of beneficiaries without any income. This, undoubtedly, would be reflected by a massive increase of poor families. Bush’s suggestion to privatize Social Security aimed to try to undermine the reasons for it to exist. Most American individuals are unlikely to create retirement funds. According to Altman, the main reason for creating Social Security was to get rid of this type of abnormalities. The system was created to form a network of common interests among citizens, undermining social class of the individual. The Social Security system origins came straight from the egalitarian approach. This, in fact, could be what conservatives hate most about it; while the effectiveness of the system could be the reason why they advocate themselves to eliminate it.
The solution to fixing the menacing future of the Social Security system is well addressed in Altman’s book, which in fact, it is very knowledgeable. The first part of the Bal/Altman proposal implies taking money from heirs once predecessors have passed away. This would mean no one is directly affected by such a measure. The second approach would lead to restore the maximum wage base. Imminently, 6% of the upper class will be affected. Nevertheless, no one would see a reduction of their benefits, and those who provide more funds, would receive more generous benefits. However, these people are likely to fight against any reformist approaching such measures. It will be interesting to see these not so ordinary citizens who will likely complain when they see their interests in danger. In fact, reformists would have to face a dirty battle.
Now, how difficult these reforms could be to achieve is a matter of the politicians will. They could be as easy as explained by Altman but, unfortunately, politicians enjoy playing hero only when they find it convenient. In fact, action towards fixing the Social Security system should be demanded by the people. The problem is people no longer trust the system. All the dirty propaganda, launched by conservatives, is responsible for this. In fact, some falsely believe it would be better to get rid of Social Security. Therefore, fixing Social Security will only be possible by providing the correct information about Social Security and its objective.

@Wunala Dreaming: What do you suggest as an alternative to compulsory super contributions then?

Also, when the value of stocks is halved in 18 months (cf the GFC), it takes one heck of a smart fund manager to protect anyone's portfolio from getting pounded. Even blue-chip, safe-as-houses (pun not intended, since housing wasn't as safe an investment as advertised - or brainwashed, was it?) stocks and bonds got hammered.

Therefore, some pretty smart, wealthy and senior people had to come back to work or postpone their retirement for a few years, because of the crash. One of them sits next to me at work.

Is an exclusively inter-generational, tax-based system ideal? Of course not. I am French, and can tell you all you need to know about the time bomb that we have for a pension system. But there are ways to mix public and private, to minimise risks and provide some income safety without resorting to unbriddled casino capitalism or soviet-style, castrating dirigisme (not that any OECD country could be described by either extreme, but you get the gist).

MakeGoodMyJumpItWillBeDone,

Please re-read my post. I do not *spend* on anything other than the basics. What am I supposed to do? Live on the streets so I don't have to pay for housing?

I fail to see how you could have misunderstood my post, since it is very straightforward and (unfortunately) factual. You make it look like I am one of those "spend first, worry about the consequences later" people. I am exactly the opposite.

But thanks for the judgemental and condescending pot shot. Very helpful.

Kouroi,

Long live Aldi, op shops, local markets and public transport! :)

I wish I had visited your part of Canada when I was living there... "My" part was a tiny bit more frosty and snowy.

MakeGoodMyJumpItWillBeDone

-has summarized the problem nicely. Canada addressed the public pension solvency issue several years ago although the benefits are pretty meagre. Public employee pension plans are poised to become an intolerable burden on an economy that will soon have as many retirees as workers. Like everything else it needs to do, government will not deal with this issue until it becomes a crisis. The solution is fewer public employees working longer hours for more years at less pay. The federal government has recently introduced a $5,000 dollar annual tax free savings account which should temper consumption and economic growth while helping people to prepare for retirement. There is also a retirement savings plan that allows a significant deduction from income tax and is widely used. There is currently a momentum building to enhance the public pension plan, I think by requiring larger contributions. I think I have a problem with this because the public plan is very conservative and so produces returns that are only marginally greater than inflation. Still the problem remains that many people are woefully unprepared for retirement due to long term unemployment, inability or unwillingness to save, illness, and now, perhaps, personal disaster in the markets. I am 52 and in the last few years I have gone from $120,000/ yr to disability pay of $35,000. After what has transpired in the markets I am doing ok but at the mercy of future inflation. I think perhaps the government should index pension contributions to economic growth. This would help to keep the brakes on the economy when it is in danger of overheating and provide some automatic stimulus when things slow down. Neither government nor consumers can be trusted to behave rationally when needed. We need to remove the politicians' hands from the economic levers to some extent. They are always far to eager to do harmful things for short term political advantage. I am very disappointed that we have a so-called Conservative government that is worse than the previous Liberal government in this regard.

Kouroi, Wunula, perhaps you misunderstand the concept of a properly allocated pension. In theory, as an employee approaches retirement age, the allocation of his portfolio becomes much more conservative, thus mitigating the risk of a market crash. Ergo the problem is not market risk.

The problem is that Western goverments make extravagant promises regarding payouts without adequately funding the pensions on the front end. Further, they disregard actuarial recommendations and assume an unrealistic return on their investments (as to hide the fact that they are grossly underfunded). It is no surprise then that by the time employees retire, their governments cannot afford to pay their pensions. Simply put, the public sector lives outside of its means.

Frankly, the people who perpetuate this problem are those who share Wunula Dreaming's point of view. Individuals (and governments) should not have a victimized, "spend first, save what's left" philosophy. Instead they should put their foot down, show some integrity, and take a proactive, "save first, spend what's left" approach.

Wunala,
My life is almost identical with yours, but Victoria, Canada is fortunately a better place to be - so I hope to retire at 65, can afford kids and my only hope is to live long enough to cash some inheritance...while watching the cruise ships coming and going from my living room.

Very good point, Kouroi.

If (check that - when) it happens, many people who were about to retire (or had just retired) will continue to work (or try to find a job as very senior people, i.e. with low employability) until their portfolios recover. Wait, it happened in 2008, and it was not pretty.

Here in Australia, the mandatory contribution to superannuation (pension fund) is 9% of one's salary. In this day and age of exploding housing costs, this is peanuts. Of course, the answer to this time bomb from super funds (and banks and insurance companies) is "contribute more". Ok, then who pays for my mortgage, food and clothing?

I live a simple life - I live in a 1-bedroom shoebox (in the inner suburbs, so I can use public transport), have not travelled in 3 years, do not own a car (cannot afford one), do not go to fancy restaurants or buy fancy clothes. I make $65k p.a. plus super and yet I struggle to make ends meet, let alone contribute to my super.

I refuse to take on more debt or have my mortgage refinanced on the back of the supposed appreciation of my apartment (basic common sense here), and I do not have a credit card.

Basically, I must make sure that I repay my mortgage in the next 20 years (good luck with that) to have any hope of beefing up my retirement fund so I do not live on the government's pension (when I finally retire at age 73).

Forget having kids (public schools are mostly crap, private ones cost more than a year's worth of mortgage repayment) or enjoying the finer things in life, despite graduating with two masters degrees.

Great. Tough crap, I guess.

and if the markets crash and asset bubbles desinflate?

I admire the Australians for implementing what I am sure was a politically unpopular move. They will be in a much stronger fiscal position than America, Western Europe, and many other nations that will be forced to confront the problem of runaway unfunded liabilities. Unfortunately in America we are less concerned with long-term budgetary solvency than we are with how much money we can vote into our pockets now.