Old Without Gold

You can be young without money but you can’t be old without it.” If we didn’t know better, we could well imagine American playwright Tennessee Williams had the pension systems of the 21st century on his mind instead of Cat on a Hot Tin Roof while penning these lines.

If you see the crystal glass as half-full, there’s much to look forward to in the future – a flexible work life; efficient and innovative technology-backed services; AI-powered homes and workplaces; a sustainable society with equitable growth and environment-friendly policies...the list goes on.

In the half-empty part, lies pension.

Old-age provision is not exactly an exciting topic. And yet, it is one of the most important themes of this century, with the ability to ruin our very social fabric if not dealt with properly.

Not everyone has the luxury of a fat inheritance to sail through sunset years. Many of us work throughout our lives, putting our faith in state pension systems to take care of us during our old age. Which begs the question: Are all countries prepared to take on the responsibility of their older citizens? 

In their latest Global Pension Report, Allianz economists measure the pension pulse of 70 countries and find that the Swedes, the Belgians and the Danish are the best placed to enjoy a financially comfortable dusk. On the other hand, Sri Lanka, the UAE and Lebanon are no countries for old men, women and non-binaries who may be dependent on pension for their livelihoods. 

A missing conversation

In the early 1900s, you would have been lucky to be alive at the age of 50. Contrast that to today, when average life expectancy goes up to 83 years in some countries. If age optimists have it right, we might start living four more years on an average by 2050.

Although it’s nice to have more time with our children and grandchildren (or even great grandchildren), the extra years don’t come free. The financial strain is greater for silver-agers who don’t have enough personal resources to foot the bills. Healthcare costs tend to increase as we grow older and some of us could even need elder care.

Yet, pension reforms have largely been missing from the high-level conversations around securing our collective future. “Pension reforms have been eclipsed by other policies in recent years, first and foremost climate change and today, the fight against Covid-19,” says Allianz Chief Economist Ludovic Subran.

To be fair, a shift in demographics is not as in-your-face a phenomenon as environmental degradation or a pandemic or a socioeconomic conflict. “But ignoring demographics, letting the looming pension crisis take center stage, and postponing generational justness and equality are major impediments to building inclusive and resilient societies,” Ludovic warns.

Dig into the details and a sobering picture emerges. By 2050, more than 1.5 billion people will be in retirement age, double the number today. The first test will begin in the next few years, when baby boomers start retiring in droves, putting the pension systems under severe strain.

As we live longer and have fewer babies, the share of people aged 65 and above in global population will increase from 9 percent now to 16 percent by 2050. Almost all regions will see the demographic shift. Europe, the oldest continent in terms of the age of its inhabitants, will remain so even after three decades. In fact, 28 percent of the European population will be 65 or older by then. 

allianz global pension report 2020 life expectancy

Strong and sustainable

So what makes a robust pension system? According to Allianz economists, adequacy isn’t enough. A good pension system has to be sustainable too.

The economists, led by Michaela Grimm, tested countries on 30 parameters under three topics: financial and demographic starting points; sustainability; and adequacy. On each parameter, they rated the countries on a scale of 1 to 7, with 1 being the best. Adding up the points, each country won an overall ranking in the Allianz Pension Index (API).

In the financial situation and demographic starting points index, many emerging countries in Africa and Asia ranked high due to their young populations and low public deficits and debts, while European countries such as Italy and Portugal fared badly. “And that is the situation before the coronavirus and its tsunami of new debt,” says Allianz economist Michaela Grimm. “One of the legacies of the current crisis will certainly be that we have to double our efforts to reform our pension systems. What remained of financial leeway is gone for good.”

The sustainability sub-index measured how systems reacted to demographic changes. Countries that tweaked their legal retirement age to adjust for higher life expectancy (such as the Netherlands) performed better.

The adequacy sub-index judged countries on how generous they were with their pension payouts. 

allianz global pension report 2020 API

Countries roundup

Topping the API were Sweden, Belgium and Denmark, followed by New Zealand and the United States.

No Asian country featured in the Top 10 list, with China coming in at 11. 

Enjoying an enviable starting position, the U.S. benefits from a big financial leeway and its demographics are relatively benign versus other industrialized nations. While it ranked above average also in sustainability and adequacy, inclusiveness remains a challenge.

At place 16, the UK pension system was found adequate and sustainable as the country moves to increase its retirement age and allocates enough capital. What Britain could do better, is initiate early retirement deductions, add a demographic factor to its pension formula and adjust the labor market to the needs of an aging workforce.

Interestingly, Germany – which has the reputation of being a frugal, meticulous financial planner – ranked 26 in the API. Although the country fared reasonably well in adequacy and sustainability, its overall position was compromised by a weak demographic starting point due to its rapidly aging population.

Italy, despite not being known for its spending savvy, ranked higher at 18. Although it shined in adequacy and sustainability, Italy struggles in the starting points of financial leeway and an aging population, realities that the coronavirus pandemic ripped into the open.

Spain, on the other hand, ranked at 44. Its public pension system, though generous, may not be sustainable in the long run. Madrid may be well-advised to increase Spain’s retirement age, initiate early deductions and offer its elders more work opportunities.

Surprisingly, France came in below Spain at 51. Like its neighbor, France has a generous but unsustainable pension system. Paris might want to think about higher retirement age, early deductions and a demographic factor in the pension formula. 

allianz global pension report 2020 country rankings

Allianz Pension Index 2020

Generation gaps

In the recent past, different generations have been locking horns over several issues, ranging from climate change and populism to the future of work. Pension could be the next generational crisis.

“Although everyone seems to be transfixed with Covid-19 right now, pension policy is a topic too important to be lost in the battle against the virus. In fact, it should form an integral part of every recovery strategy: It’s key to unlocking precautionary savings and addressing growing inequalities. If the looming pension crisis cannot be defused, the social fabric might become even more frayed and a further rise in populism, with all its negative consequences for economic and individual freedom, seems inevitable,” finishes Ludovic.

For a more detailed look into the findings, click here for the Allianz Global Pension Report.   

The Allianz Group is one of the world's leading insurers and asset managers with more than 100 million retail and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 766 billion euros on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage 1.7 trillion euros of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we hold the leading position for insurers in the Dow Jones Sustainability Index. In 2019, over 147,000 employees achieved total revenues of 142 billion euros and an operating profit of 11.9 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

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Lorenz Weimann
Allianz SE
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