A global retirement crisis is bearing down on workers of all ages.
Spawned years before the Great Recession and the financial meltdown in 2008, the crisis was significantly worsened by those twin traumas. It will play out for decades, and its consequences will be far-reaching.
Many people will be forced to work well past the traditional retirement age of 65 - to 70 or even longer. Living standards will fall, and poverty rates will rise for the elderly in wealthy countries that built safety nets for seniors after World War II.
The problems are emerging as the generation born after World War II moves into retirement.
"The first wave of under-prepared workers is going to try to go into retirement and will find they can't afford to do so," says Norman Dreger, a retirement specialist in Frankfurt, Germany, who works for global consulting firm Mercer.
The crisis is a convergence of three factors:
- Countries are slashing retirement benefits and raising the age to start claiming them. These countries are awash in debt after overspending last decade and racking up enormous deficits since the recession. Now, they face a demographics disaster as retirees live longer and falling birth rates mean there will be fewer workers to support them.
- Companies have eliminated traditional pension plans that cost employees nothing and guaranteed them a monthly cheque in retirement.
- Individuals spent freely and failed to save before the recession, and they saw much of their wealth disappear once it hit.
Those factors have been documented individually. What is less appreciated is their combined ferocity and their global scope.
"Most countries are not ready to meet what is sure to be one of the defining challenges of the 21st century," the Center for Strategic and International Studies, a Washington think tank, concluded in a report recently.
The notion of extended, leisurely retirements, is relatively new. German Chancellor Otto von Bismarck established the world's first state pension system in 1889.
In the prosperous years after World War II, governments in rich countries expanded their pension systems. Plus, companies began to offer pensions that paid employees a guaranteed amount each month in retirement - so-called defined-benefit pensions.
It got even better in the 1980s. Many countries began to coax older employees out of the workforce to make way for the young. They did so by reducing the age employees became eligible for full government pension benefits. The age fell from 64.3 years in 1949 to 62.4 years in 1999 in the relatively wealthy countries that belong to the Organisation for Economic Cooperation and Development (OECD).
That created a new, and perhaps unrealistic, "concept of retirement as an extended period of leisure," Mercer consultant Dreger says. "You'd take long vacations. That was the Golden Age."
Then came the 21st century.
As the 2000s dawned, governments - and companies - looked at actuarial tables and birth rates and decided they couldn't afford the pensions they'd promised.
People were living longer: The average man in 30 countries the OECD surveyed will live 19 years after retirement. That's up from 13 years in 1958, when many countries were devising their generous pension plans.
The OECD says the average retirement age would have to reach 66 or 67, from 63 now, to "maintain control of the cost of pensions" from longer lifespans.
Compounding the problem is that birth rates are falling just as the bulge of people born in developed countries after World War II retires.
Populations are ageing rapidly as a result. The higher the percentage of older people, the harder it is for a country to finance its pension system because relatively fewer younger workers are paying taxes.
In response, governments are raising retirement ages and slashing benefits. In 30 OECD countries, the average age at which men can collect full retirement benefits will rise to 64.6 in 2050, from 62.9 in 2010; for women, it will rise from 61.8 to 64.4. Italy is raising the age from 59 to 65.
In the wealthy countries it studied, the OECD found that the pension reforms of the 2000s will cut retirement benefits by an average 20 per cent.
Even France, where government pensions have long been generous, has begun modest reforms to reduce costs. France has raised the number of years people must work before they can receive a full pension from 41.5 to 43. More changes are likely coming.
The fate of government pensions is important because they are the cornerstone of retirement income. Across the 34-country OECD, governments provide 59 per cent of retiree income, on average. The government's share ranges as high as 86 per cent in Hungary. In the United States, the world's largest economy, it's about 38 per cent.
If rich countries don't cut pension costs even more, says credit-rating agency Standard & Poor's, their government debt will more than triple as a percentage of annual economic output by 2050. The debt of most countries would drop to what is commonly called junk status.
Many of those facing a financial squeeze in retirement can look to themselves for part of the blame. They spent many years before the Great Recession borrowing and spending instead of setting money aside for old age.
"People are going to be shocked at how little they have," says Alicia Munnell, director of Boston College's Center for Retirement Research.
As if demographics weren't burden enough, the outlook became worse when the global banking system went into a panic in 2008 and tipped the world into the worst recession since the 1930s.
Government budget deficits - the gap between what governments spend each year and what they collect in taxes - swelled in Europe and the United States. Tax revenue shrank, and governments pumped money into rescuing their banks and financing unemployment benefits and other welfare programs.
That escalated pressure on governments to reduce spending on pensions or raise revenue. Hungary took one of the most draconian steps: It demanded that its citizens surrender their private retirement accounts to the government or give up their government pensions. Poland seized a portion of private retirement accounts. Ireland imposed an annual tax on retirement accounts.
The Great Recession threw tens of millions of people out of work worldwide. For many who kept their jobs, pay has stagnated the past five years, even as living costs have risen, making it tougher to save for retirement. In addition, government retirement benefits are based on lifetime earnings, and they'll now be lower.
Less money from a government pension isn't the only factor weighing on future retirees. When the financial crisis struck five years ago, the world's central banks cut interest rates to record lows to stop the economic free-fall. That also punished people with much of their money in investments that pay interest.
"The low-interest rate environment has been brutal," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. She points out that $US500,000 in savings would yield $US25,000 a year at an interest rate of five per cent, just $US2,500 at 0.5 per cent.
The crisis also frightened many away from the stock market. Stocks can be riskier than other investments, but they yield more long term. Many investors have shunned stocks while the world's stock markets have soared. In the United States, the Dow Jones industrial average has risen nearly 150 per cent since March 2009. Japan's Nikkei index is up 56 per cent just this year.
But the past five years have been so tumultuous that some people have been reluctant to invest at all.