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Sep 9, 2007

Pensions: A race to the finish

Even as Singapore tweaks its 52-year-old Central Provident Fund system to ensure that longer-living Singaporeans have enough money to live on, countries around the world are buckling under the burden of large payouts to a rapidly ageing population that is also living longer

By Cheong Suk-Wai

CUBA-BORN lawyer Carmelo Mesa-Lago received his first pay cheque in 1959 and worked his way to becoming the world's foremost authority on pension reforms.
Forty-eight years on, the 73-year-old still writes for eight straight hours a day, advises governments, gives talks all over the world and teaches short courses at the University of Pittsburgh in Pennsylvania, where he is professor emeritus.

His state pension since retiring in 2002? US$1,600 (S$2,400) a month.

On the phone from his office, he tells The Sunday Times that after he and his wife top that up with her pension and his fees from talks and book-writing, they get by on US$127,000 a year.

Says Professor Mesa-Lago, who, along with South Africa's Mr Nelson Mandela, has just been awarded the International Labour Organisation's inaugural Decent Work research prize: 'When people ask me when I will retire, I ask them: 'What are you talking about?'

'I don't believe in retirement. You have to do something with your brain every day, otherwise your body will deteriorate.'

He would feel right at home in Singapore then, where the retirement age is 62, with re-employment possible up to 65 come 2012, and then 67.

When he grows too old to travel, he will start living on his savings from a private pension scheme for teachers in the United States, which he signed up for in 1967.

He is one of the lucky ones in the growing pool of seniors around the world.

Since the 1960s, the world has been greying at an unprecedented rate in human history, says the United Nations. Its World Population Ageing report this year shows that, by 2047, there will be more elderly people than children in the world, thanks to better nutrition and breakthroughs in medicine and elder-friendly technology.

The global pool of elderly people is growing at a rate of 2.6 per cent a year while the global pool of babies is increasing at only 1.1 per cent a year.

This has most countries - especially old, rich ones such as Britain, Japan and the United States - in a tizzy because, for so long, they have provided for their elderly via regular fixedinstalment pensions, also known as defined-benefit schemes or pay-as-you-go (PAYG), in the spirit of 'today's workers paying today's pensioners'.

PAYG has acted as a financial safety net for the elderly, who are often the people most in need of cash to pay mounting medical bills, and so has lifted many out of poverty, says the Organisation for Economic Cooperation and Development (OECD), which tracks development trends in 30 democratic countries.

But with fewer babies being born today, where will governments find the extra workers tomorrow to pay the high taxes necessary to support tomorrow's retirees - most of whom will be today's retirees too, since they are living longer.

It is a ticking time bomb to which many governments have been slow to respond.

Ms Monika Queisser, a senior OECD pensions and social policy analyst, explains the delay: 'The biggest obstacle to pension reform is the fact that they are long-term undertakings, much longer than electoral cycles.

'Reforming pensions is painful at least to some groups, and costs - be they in the form of lower benefits, longer working lives or higher contributions and taxes - are often perceived and felt sooner than the benefits of reforms.'

Indeed, Prof Mesa-Lago says, it takes at least 60 years to change over completely from the PAYG system to defined-contribution schemes such as Singapore's Central Provident Fund (CPF). It's what American workers call Yoyo (You're On Your Own).

It is only natural that a system as entrenched as a state- or employer-sponsored pension scheme - since the 1940s, in fact - should be painful to dismantle through pension reforms.

But reform governments must, if they are not to buckle under the burden of bankruptcy from having to provide more pensions. In all this, Singaporeans are relatively fortunate: the Government has put them on the centrally run Central Provident Fund (CPF) forced-savings scheme since 1955. Over the years, the CPF has enabled them to own property and cope with rising medical costs.

Today, there are 3.1 million CPF members, of whom 1.46 million are still contributing to the fund, as of last year.

On top of this good footing early on, Singapore's small size means the Government can marshal the people quickly to save more to cover the costs and risks of longevity, as in the recently announced move to introduce a compulsory annuity for seniors.

Also fortunate is Chile which, with the help of Prof Mesa-Lago, switched from PAYG to a CPF-like scheme in 1981.

Then there is the happy exception of the Netherlands, which does not need to reform at all because its employers and workers decided very early on to build up the country's pension reserves by having both employer and employee put a bit aside regularly for retirement, says the OECD.

Otherwise, says Ms Queisser, people living longer means accepting that (1) a modern pension scheme can no longer hand out lump sums and (2) each drawdown from one's savings must shrink so that the entire sum can be stretched further.

So in life's extended race today, which countries are gliding ahead as a rock-solid Volvo or a family-friendly Toyota - or sputtering along in a beat-up old jalopy or, worse, spinning for dear life on a mountain bicycle?


Promises, promises


PROF Mesa-Lago points out that being slow to make workers themselves save up for retirement - essentially what pension reforms are trying to do - has meant that inflation has made it more expensive for employers to introduce employer-sponsored retirement savings plans today.

Except in Chile, the mandatory regular contributions of workers to their own retirement accounts are often matched by an equal or slightly smaller contribution from their employers, up to a point.

Since the 1980s, many big companies in the United States and Britain have tended to over-promise their contributions to their employees' retirement savings plans, while lax laws allowed them to under-declare their actual pension promises.

To top it all, such companies often invest the money from such employee retirement schemes in the stock market so they can use the market gains to offset the actual amounts they have to put into their employees' retirement kitty.

But when the bottom falls out of the stock market and health-care costs spike, employers wind up with too-costly employee retirement plans, leading to pension deficits and government bail-outs.

Worse, employees in employer-sponsored plans such as the US' popular 401(k) often sink large portions of their retirement savings into their own company's stocks. This means that if their company goes belly-up, as fraud-riddled Enron did in 2003, they lose not only their jobs but also their retirement savings. The lesson? Diversify investments, and don't put much stock in employers.

US presidents Bill Clinton and George W. Bush have tried to overhaul the federal pensions programme - the burdensome Social Security - by diverting part of workers' pensions into government-run personal accounts and letting workers invest the money.

But this requires workers to take charge of their own retirement accounts, a situation which has been likened to asking Americans to switch from a car with automatic to manual steering.

With Social Security in deficit and people living longer, taxes have to be raised and benefits cut if payouts are to continue, but Americans have so far been unwilling to bear the pain of reforms.

Britain is notoriously tight-fisted with its pension payouts, and so does not have Mr Bush's dilemma.

What it faces is 10 million of its 60.5-million-strong population - mostly 30-somethings - having no retirement savings to speak of. They would rather spend what money they have now than save for a future that is uncertain at best, says Mr Chris Curry, the research director of the Pensions Policy Institute, a British think-tank.

So, from 2012, Britain will raise the retirement age to 68 and automatically enrol any worker aged 22 or older in a defined-contribution plan. Workers have to put a certain amount into their own retirement account regularly with employers also contributing their share.

But Mr Curry says the issue is whether people should be saving like this in the first place. Low wage earners may not be able to afford to put aside 4 per cent of their income every month in the new defined-contribution scheme. 'Plus,' he says, 'for every pound you put in your personal account, you lose 60p of value on your state pension.' This is because the state assumes that those in the defined-contribution system have money to save, so they get a smaller payout from the state pension scheme.

Reform not for reform's sake

GOOD intentions aside, committing to daring pension reforms is no guarantee of success either. Just ask Italy, home to the languid mindset of la dolce vita, which is now finding life after its innovative reforms is not so dolce after all.

In 2004, it decided to give every Italian an individual retirement account, whose returns are linked to GDP growth to encourage him to work harder and longer.

Thing is, despite ageing the fastest in Europe, most Italians want to retire before they turn 60, and so are at great risk of not having enough savings to live on in their golden years.

Plus, Italy is stretching out these reforms till 2030, which means it will take a long time to build up its reserves for retirees. As critics put it: What is the point of being innovative if the innovating is over more than 20 years?

Governments ignore the sentiments and psychological costs of pension reforms at their peril, says Dr Hiroko Akiyama, who heads the University of Tokyo's programme for gerontological research.

She tells The Sunday Times: 'First, there will be a lot of worry about money in old age because you don't know how long you are going to live - 85? 95? 105? - so you don't know how long your money will last.

'The other more recent issue is the sustainability of Japan's pension system. I'm contributing to this social security system, but will it even exist when I am 80 or 90?'

In recent weeks, Japan's pension system has been scandal-plagued, first, by the loss of 50 million pensioners' records, and then by a 342 million yen (S$4.6-million) embezzlement by pension officials.

In forward-looking and forward-planning Singapore, the big fuss over the CPF changes has been the Government's proposal of a compulsory annuity to be funded by CPF savings, but whose returns cannot be inherited. Ms Queisser says: 'Unfortunately, there is not much governments can do about people's frustrations in this respect because the whole idea is to provide some sort of insurance for people who are living longer.

'Making annuities compulsory is the right way to go even if it means that money can't be passed on.'

But while most countries have tackled ageing populations by reforming pension systems, experts interviewed say pension reforms are not enough.

Indeed, they add, the best insurance for a good old age is a good diet, a good work-out and good work every day. In this, one might take a leaf from Japan, which has the world's oldest population.

Says Dr Hideki Ito, the director of the Tokyo Metropolitan Gerontological Institute and the Tokyo Metropolitan Geriatric Hospital: 'It is very difficult to live long and live well, especially when Japanese society is so stressful.

'But somehow we manage to live longer than most people because of a nutritional diet, a good health-care system and a willingness to work longer.'

suk@sph.com.sg

Plans for retirees in other countries
& BRITAIN



What it is: From 2012, any worker over the age of 22 and earning more than £5,000 (S$15,000) a year will be automatically enrolled in a personal retirement account, on top of the state pension he already gets. The retirement age will be raised from 60 to 68.
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