Pensions are a Problem in a Global Recession

There has been a lot of discussion in the United States and Europe about the cost of state-funded pensions--which are almost always PAYGO (pay as you go--current workers are paying for current retirees). The age structures of richer countries are heavy on the elderly of retirement age and light on the younger people of working age. This is why schemes are promoted to have workers pay into their own private pension plans over their lifetimes. In the current global recession, however, investments in the stock market, which are the major ways to "grow" your own pension, are going down, not up. As a report by Reuters notes, this may wind up forcing a delay in the retirement age even if governments don't push such a legislative agenda.

Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.

But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.

With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.

Private pensions are more important in the United States than the public discussion about Social Security would have you believe. Consider this: In 2011 the average annual Social Security payments in the US add up to just $14,124 per year. For a single person, this is only a bit above the official poverty level of $10,890. And when you consider the medical costs associated with aging, it is no wonder that the thought of cuts to Medicare have the elderly in the US very worried.