Friday, June 15, 2012

Europe's Underfunded Retirement Savings and Huge Indebtedness ... Looks like Ours Will Look in Time

Although it's not a good thing, we in the U.S. seem to have a lot in common with the European welfare entitlement state. We're not that far gone --- yet --- but it is nevertheless quite worrisome if only because of the direction in which we're headed.

In that regard, Europe's Pension Crisis Yet to Come of Age says this:

"Europe's troubles look daunting enough already, but another crisis looms.

Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees. As governments scale back benefits, companies and individuals face a rising burden. But saving for old age could prove a crushing blow to growth.


There are three types of European pension shortfalls. First, from governments, . . . in most countries they are financed by tax contributions. Pension deficits are typically left out of public debt figures, but the average EU country would need to set aside 8.3% of GDP a year to fund current pension policies...

Aging populations are a further strain. In 2010, the average EU pensioner was supported by almost four workers; by 2050 it will be two. The current average retirement age is 61, but may need to be as high as 75 to make state pensions sustainable . . . .

Company deficits, the second type of shortfall, also have grown. The Netherlands and the U.K. have large defined-benefit pension plans that are part-financed by employers. Here, investment performance has disappointed: Real annual returns for pension funds in most Organization for Economic Cooperation and Development countries were negative from 2008 through 2010. In the U.K., pension plans are sitting on an estimated £217 billion ($334 billion) shortfall. . . .

Individuals are the third source of concern. . . . as governments struggle with rising debt, more countries are shifting the pension burden onto workers, encouraging them to pay into defined-contribution plans in which returns depend on investment performance. Countries like the U.K. also are continuing to shift from defined-benefit to defined-contribution plans. Yet today's low-yield environment offers little incentive to save. Household savings rates have fallen to 11.4%, from 13.4% in 2009 . . ..

Today's workers would need to set aside an extra €3,100 ($3,860) a year to adequately fund their retirement in Italy and €12,000 in the U.K., estimates insurer Aviva. That's on top of their state pension, assumes a 5% return on investments, and an income equivalent to 70% of their pre-retirement earnings. Some of the biggest needs for individual savings are in recession-hit countries like Ireland and Spain, where boosting savings rates would be a further hit to growth.

That's a problem to tax even Europe's wisest old heads."

Summing Up

Unfortunately, the U.S. situation is not unlike that existing in Europe.

For both of us, it's as simple as 1-2-3-4.

(1) Government underfunding is a huge issue in relation to public sector employees' retirement benefits promised.

(2) Private sector companies' pension plan performance has materially underperformed assumptions about returns on investments due to the weak economies and poor stock markets the past several years.  401(k)s are now commonplace in the private sector.

(3) Too many individuals are heavily indebted, underinvested and without stable retirement income prospects due to poor savings habits and the super low interest rate environment today.

(4) We're aging as a society and retiring earlier, too.

These four factors will act as a substantial drag on economic growth for years to come in both Europe and the United States.

The debt hole is already deep enough. Let's stop "digging by government stimulating" or we'll never get out.

Thanks. Bob.

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