Region should act to protect the elderly’s quality of life
Many people look forward to their retirement years, imagining idyllic scenes of family gatherings, travel, hobbies, balancing solitude and socialization, and many other unforgettable experiences one can enjoy after years of dedicated work. The key, however, is to ensure one has sufficient financial security to live out these golden years in comfort.
Unfortunately, the world is facing significant demographic shifts that are threatening the sustainability of retirement systems worldwide. A notable trend is the global rise in the proportion of people aged 65 and over, which is forecast to reach as many as one in six people in the world by 2050. The world has also witnessed a longevity revolution that has increased the average life expectancy from 47 years in 1950 to 72 today, with a further increase to 77 years expected by 2050. At the same time, there is a worrying shrinkage in working-age populations due to decreasing fertility rates.
All these factors have put insurmountable pressure on current pension funds to maximize investment earnings with dwindling financial contributions from the workforce, while at the same time paying out to a burgeoning number of retirees. Research shows that, on average, retirees outlive their pension incomes by between eight and 20 years, with women in particularly precarious situations due to their longer life expectancy and pension savings that are on average 40 percent lower than men’s. According to the World Economic Forum, the retirement savings gap is forecast to reach $400 trillion by 2050 in the eight most populated or developed savings markets.
Sooner or later, governments are going to have to address this imminent crisis by reforming retirement systems to ensure financial security for current retirees and future generations alike. Saudi Arabia last week announced a plan to modernize its pension system by merging the General Organization of Social Insurance with the Public Pension Agency. The new entity will manage assets of more than $250 billion and will strive to be among the Top 10 pension funds in the world.
But the Middle East still has a long way to go when it comes to securing retirement incomes for its elderly segment, as it faces challenges due to aging populations, poorly managed investments, and limited contributions by workers due to restrictive pension enrollment criteria, high unemployment levels and a lack of family-friendly policies that incentivize long-term work among women.
As such, retirement systems need to be modernized to respond to the changing needs of society. This includes looking into raising the retirement age to allow for more flexibility in terms of earning and saving, incentivizing long-term work and pension contributions that are sufficient, educating people on financial literacy and retirement planning, giving employees access to personalized investment solutions, ensuring regular and personalized communication with pension contributors on their financial standing, and ensuring pension plans are inclusive of all working groups, such as part-time workers and the self-employed.
Equally important is ensuring the sustainability of pension funds by delegating their management to professional investment teams that are savvy enough to navigate global markets and find earnings opportunities. The Canada Pension Plan Investment Board is a successful model on retirement financial security that is outsourced to a team of professional investors. It is a crown corporation responsible for managing and maximizing long-term investment returns from employees’ pension contributions. The fund is currently worth $497.2 billion and is projected to surpass $1 trillion by 2032. Over the past 10 years, it has achieved a net rate of return of 10.8 percent and is projected to be sustainable over the next 75 years.
Meanwhile, it is also important to introduce family-friendly policies that incentivize people to remain in the labor market for longer periods, especially women. Data shows that more than half of the global workforce is employed in informal or unorganized sectors, which limits their access to public pension funds. Japan’s Government Pension Investment Fund, considered the largest in the world with assets of $1.7 trillion, recently addressed this issue by allowing part-time and short-term workers to enlist in its public pension plan. This decision will increase the number of pension contributors by about 650,000, including the elderly and women. The government has also introduced a new law that increased the age at which pensioners can receive their incomes to 75 years.
Many workers have also taken a personal interest in managing their retirement incomes according to their needs. For example, Singapore’s Central Provident Fund is an innovative mandatory social security savings scheme that invests workers’ contributions and brackets them according to retirement, housing and healthcare needs. Contributors have the option to manage their investments and payout rates according to their needs. Users can log into their personal accounts to view historical contributions and their investment earnings, giving them a glimpse of their financial standing. Many employees are also enlisting the services of private wealth management companies to boost retirement savings, allowing them to be involved in selecting preferred investment opportunities rather than opting for a one-size-fits-all public model.
That said, it is pivotal that governments offer financial literacy programs so that people can be better prepared financially for retirement. For example, the Australian Securities and Investments Commission’s “Moneysmart” program offers free online guidance on how to make informed financial decisions, manage money smartly on a daily basis, reduce debts, grow wealth, and plan for a financially secure future. Its retirement calculator gives insights to users on projected incomes from pension contributions based on retirement age, investment options and estimated costs that could affect retirement incomes.
By modernizing retirement systems in the region, governments can ensure people can look forward to their golden years and the chance to etch many more beautiful memories.
Published in Arab News.
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