The Economist online today called for abolishing current retirement schemes and starting over. In support, George Magnus argued that current schemes are unsustainable. Opposing, Christian Weller contended that the current system can be put right if we have the will to do it. Voters so far have given the proposal a resounding online victory.
By Robert Stowe England
June 16, 2009
This house believes that retirement in its current form should be abolished.
With that proposition, intended to shock the reader and prompt debate, The Economist, the bright and brassy British weekly, this morning launched a lively online discussion about the design, cost, security and sustainability of current Social Security and other private and public retirement schemes around the world.
The proposal was published on The Economist Web site at this location: http://www.economist.com/debate/overview/147
From the launch of the debate, the 'yes' choice had a supermajority of total votes. By the end of the day (Tuesday), support for the proposal stood at 86 percent. Opposition, at 14 percent.
(Update Wednesday July 17 mid-day Eastern time: Support for the proposal has slipped slightly to 82 pecent for Tuesday only. The Economist online publishes outcomes for each day the poll continues.)
In a format The Economist has successfully employed to promote lively, constructive debate in the blogosphere on a variety of issues, two experts were chosen to start off the discussion with opening statements.
The man who made the proposal -- George Magnus, senior economic adviser at UBS Investment Bank in London -- presented his reasoning for advocating the abolition of the current system.
In his statement, Magnus said that the expected increase in the share of the population that will be dependent on the working age population will be so large that current systems cannot find the resources pay out the benefits from future workers.
The opposing case was made by Christian Weller, senior fellow, Center for American Progress in Washington, D.C., and professor of public policy at the University of Massachusetts in Boston. He contended that society had the wealth to shore up the system which only needs a little "tweaking," as The Economist moderator Barbara Beck put it.
By the end of the day, there were 46 comments about the opening statements, many serious, some thoughtful, some flippant.
(Update on Wednesday June 17 mid-day: Comments are up to 62. Plus, The Economist online has added an expert response from Sir Sandy Crombie, Chief Executive, Standard Life plc, Edinburgh, Scotland. Sir Crombie noted that Standard Llife's recent report, "The Death of Retirement", supports the motion that retirement in its current form should be abolished.)
"Indeed," Sir Crombie writes, "Our report, based upon research conducted among [the United Kingdom's] baby boomers, indicates that people will abolish the current understanding of retirement themselves without help from their country's leaders.")
A respondent with the screen name "tmoln" captured the somber resignation that was found in many posts: "Financial security is not assured no matter how 'cognitively advanced' one may be (with the implication one can successfully predict the future) or how many social support structures may be in place."
Magnus's key recommendation is to have people work longer, if they wish, and to end all mandatory retirement ages.
If people work longer, it means they reduce the time they are in the dependent sector of the economy, they spend more time contributing to retirement schemes and less time taking funds from them and, at the same time, improve the overall economic prospects of countries facing shortfalls in old age benefits, Magnus stated.
"People will simply have to become more financially self-reliant, notwithstanding that up to half of people surveyed in several [Organization for Economic Cooperation and Development (OECD)] countries report currently [that] they are not saving at all or not saving enough for retirement," Magnus wrote.
In his argument, Weller largely discounted the demographic issue by pointing out that the dependency ratio of people over 64 or below 20 was 0.7 percent in 2008. In 1950, it was also at 0.7 percent. So, what's the big problem?
Weller wrote: "It's easy to lose sight of some fundamental facts in the middle of this financial and economic tsunami, but the truth is that we can still afford retirement. It is a matter of willingness to pay for retirement, not of the ability to do so."
Weller asserted that the "three-legged stool -- public pensions, employer pensions and personal savings -- is still the bedrock of retirement income security. It is just that all parts of the three-legged stool have become very wobbly, and tightening them again can ultimately support a dignified retirement for all workers."
The strong support shown for abolishing the current system and starting over signals serious dissatisfaction and disillusionment, at least in some quarters, with all retirement schemes, public and private.
No doubt the economic and financial crisis that spread around the globe last year is fueling skepticism about retirement schemes.
Part of this is due to the losses in funded schemes. And, part is due to the huge deficits that are being created now in reaction to the current economic and financial crisis, making the task of funding future shortfalls in pay-as-you-go schemes more challenging.
Many people now expect bigger cuts in public schemes in the wake of current and near-term rising deficits -- no matter what politicians are saying.
True, as Weller suggested, the demographic argument may not be as compelling in the United States in terms of Social Security, partly because the shortfall is more manageable in a country with a more modest benefit and a replacement fertility rate.
However, the demographic argument cannot be so easily dismissed in most Western nations, Japan and China -- nearly all of which face serious challenges and engender serious doubts shared by most observers about their sustainability of their systems.
For a look at the problems facing China, go to this link: http://mindovermarket.blogspot.com/2009/05/china-needs-bold-retirement-policy.html
While funded schemes and personal responsibility for retirement have been the drumbeat since the early 1990s in many countries, the downside of investing in financial markets has been made abundantly clear with two huge crashes in equity values: one in 2000 and the other in 2008.
In mixed systems, wherein some of the retirement benefit is pre-funded and some is pay-as-you-go, the risks are diversified. But, as we have seen, both approaches can bring disappointing results at the same time. Pre-funded assets can face significant losses at times that may be critical for retirees.
The rising deficits also raise another specter: that those who build up an accumulation of funds for retirement could see their value decimated if nations decide to inflate their way out of their mounting debts.
The argument for working longer -- regardless of whether you favor tweaking the current system or a radical overhaul -- is the most compelling argument for the reasons enumerated by George Magnus.
There is also here an argument for accumulating far more assets than one expects to need in retirement and to curtail current consumption as a bulwark against longevity risk and the possibility that one will not be able to work beyond a certain age.
As well, an individual might want to allocate some of his or her accumulated funds in commodities or real assets that would protect one against inflation, too.
Whatever one decides about how to prepare for retirement, it seems that it has become much more difficult to achieve retirement security.
Copyright 2009© by Robert Stowe England