Daily Management Review

The Growing Iceberg of Pension Funds


03/16/2016


Unfunded pension obligations of 20 OECD countries reached $ 78 trillion. For comparison, total debt of the same governments is almost 2 times less ($ 44 trillion).



pixabay.com
pixabay.com
Ever since the financial crisis of 2007-2008, a huge public debt was one of the major causes of concern. Yet, nobody thought about pensions, for which there is simply no money. These commitments have not yet been included in ration of gross government debt to GDP in OECD countries.

Citi’s experts examined the problem, and presented it as an iceberg: the surface part is the national debt, and underwater – the pension. On average, the ratio of unfunded pension liabilities to GDP was 190% in each of the 20 assessed countries. A common indicator (debt to GDP) is now at the level of 109%.

If we include the first into "conditional debt" and sum with the second, the total debt burden in OECD countries will be 300%. Even Japan with its 250% significantly lags behind that fair mathematics. Not that Japan is a classic example of a developed country that is not quite certain on how to ensure the growing category of senior citizens in the near future.

The world faces a completely new - pension - crisis, warns Citi. The Bank proposes measures to combat it, and Citi experts themselves realize that they (due to their realism) would be extremely unpopular with everyone - from ordinary citizens to employers and governments.

All OECD countries should increase the retirement age for at least 1-2 years. This will reduce the burden on the budget. Citi also proposes to introduce a complex collective defined contributions system. In short, its essence is to withdraw from the current salaries more on future pensions.

Further methods include the "soft propaganda". That is, a government should spend money not on retired themselves, but rather on agitation of working citizens, for them to start to save for the dignified old age.

At the moment, employers around the world (both in private and in public sectors) have a myriad of ways to delay contributions to pension funds. For example, majority of employees will retire in 15-20 years. So why pay now, if the money can be put in the stock market to create additional income for future retirees and the company itself?

Then it turns out that the investment was unreliable and means burned. It’s time to pay back, and there is nothing to pay to the pension fund. This, incidentally, is one of the important reasons for establishment of the underwater part of the 78 trillion- debt iceberg. Citi offers to abolish all the mechanisms of delay and oblige employers to make pension contributions on a regular basis, in full and on time.

Citi warns that all stakeholders need a complicated, almost impossible compromise. Otherwise, the world will sooner or later face a financial disaster, the consequences of which will be felt for decades. The crisis of 2007-2008 may seem a joke its background.

source: businessinsider.com.au






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