Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
understanding the need to pursue a multi-pillar approach, save more (Pillar III) and
mitigate the risk of outliving savings through the purchase of annuities.
Gordon Stewart, Liaison Officer North America, The Geneva Association, complements
the global stakeholder view with a specific perspective on retirement security in the
United States as a major national challenge. The author focuses on the consequences
of an erosion of the old-age security system in the U.S. when a central pillar of a noncomprehensive
national retirement system falls. Stewart argues that the most serious
threat to the stability of the four pillars in the U.S. results from the virtual demise of
the second pillar of employer-sponsored DB plans and the inability of the third pillar
of individual defined contribution (DC) plans as presently structured to fully carry its
own weight, especially in the current environment of record-low investment yields.
He diagnoses a “retirement crisis in slow motion, one which can be met, but only if its
government, business community, and individual stakeholders find the will and the ways
to overcome their increasingly bitter divisiveness and recover their historic ability to
transcend political differences when the future of the nation itself is threatened.”
Against this backdrop, the author addresses the key question of how the deteriorating
outlook for retirement security can be halted and altered. In Stewart’s view, individual
stakeholders cannot do so—whatever their size, importance, and intentions. He argues
that insurers are near the top of the list of concerned stakeholders, given that pensions,
annuities and tax-advantaged asset growth are among their core competencies and reasons
for being. Stewart stresses that insurance concepts and mechanisms will be indispensable
to any comprehensive national solution. “And it should not be beyond the financial
capability of insurers and the political competence of government to develop or revise
public policies that will enable insurance concepts and mechanisms to greatly strengthen
Pillar III private savings as a foundation of the retirement security of those workers who
have access to them and sufficient income to accumulate significant savings,” Stewart
concludes.
The International Monetary Fund (IMF) analyses the implications of global ageing
and increasing longevity from a public finance and fiscal policy perspective, focusing
on advanced economies. The authors argue that public pension reform and a major
rationalisation of public spending will be a key policy challenge in advanced economies
over coming decades, not least as many countries will need to achieve meaningful
fiscal consolidation over that period. The economic and financial crisis has significantly
exacerbated the fiscal challenges ahead. At the same time, “it is important that pension
reforms do not undermine the ability of public pension systems to alleviate poverty among
the elderly,” the authors emphasise.
According to the IMF, in advanced economies, public pension spending increased from
5 per cent of GDP in 1970 to 8.5 per cent in 2010. The four drivers behind the change
in public pension spending as a share of GDP are ageing, eligibility rates (the number of
pensioners as a proportion of the population 65 and older), replacement rates (the ratio of
average pension to average wages) and labour force participation rates.
The authors share their outlook for public pension spending and expect it to increase by
about 1 percentage point of GDP over the next two decades. In addition to these projected
increases in public pension spending, governments face other fiscal challenges, most
notably from their healthcare systems. In advanced economies, public health spending
is projected to rise in these countries on average by 3 percentage points of GDP over the