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Global Pensioners Living on a Promise

A major pensions feature in the 16th February Economist is the preparedness of developed countries to meet promises of pensions to their ageing populations. The promises were easy to make when the countries had bulging workforces and small aged populations. Using pay-as-you go taxes on workers to pay the retired was easy economics then. Now as the demographic structure reverses the promises are going to hard for governments to live up to where there are no funded assets.

Not only has retiree life expectancy increased in the last twenty years by over 6 years, but early retirement has been encouraged with average retirement ages falling by 5 years over the same period - i.e. the income support period has increased by 11 years

Australia stills ranks well down the list in terms of contribution rate and pension assets versus GDP. Australia has 40% of GDP in accumulated superannuation assets versus Britain at 90%, Netherlands at 115% and Switzerland at 135%.

The one thing Australia does have going for it is a compulsory privately invested savings rate. However after taking out up front tax ( a peculiarly Australian and NZ invention) the current 9% target reduces to a net input of 7.65% of pay for average earners and 6.3% for higher paid. It is argued by Australian pension experts that the net contribution rate needs to be 12 to 15% of pay.

The US social security contribution is 12.4% of pay and there are additional voluntary employer and employee provided pensions. Germany has recently taken action to introduce partial private funding and is shaving back pensions from 70% to 64% of net wages. However even with these changes the required contribution to fund Germany's pensions is 25% of pay. For Italy it is 33%.

Posted Sunday, 10 March 2002

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