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US pension system among those to be stressed as the ‛Working age’ population is expected to shrink

Date: November 29 2012

New York, November 29, 2012
The economically vital 15-64 age group is set to drop by as much as 6% as a percentage of total population in some nations in the next eight years, highlighting the pressure on unfunded national pension systems, says Mercer.
The United States is among the countries facing a decline in this age group, from 66% of total population today to 64% in 2020, while the percentage of those 65 years of age or older is expected to climb from 14% to 16%.
Canada, Japan and Russia are major economies in which the working age population as a percent of total population is expected to decline by 4%, while Hong Kong is projected to have a 6% decline. China and the United Kingdom, as well as the United States, are expected to see a 2% decline.

By contrast, in some major growth economies the working age population will grow as a percentage of total population over the next eight years. These include Pakistan, which is expected to see a 3% growth, and 2% growth is projected in Brazil, India, Indonesia, Malaysia and Mexico.
 “While the changes seem small in percentage terms, one must remember that this is a dramatic demographic shift over the next eight years, represents hundreds of millions of workers, and can have a major impact on state pension systems,” said Arthur Noonan, senior partner in Mercer’s retirement business. “In the United States alone, 70 million baby boomers are approaching or have reached retirement. Social Security and most other national retirement schemes are state funded and start paying pensions from around age 65, so a contraction in the numbers of the most economically active group will see a reduction in funds available for welfare, health and retirement programs. Concurrently, the 65+ group in a country might be increasing, drawing on a greater proportion of scarcer financial resources from the smaller working population.”
Many Governments have reacted to their ageing populations by a mixture of increasing the minimum payment age for the state pension and reducing the pension paid. According to Mercer, companies, already coping with the impact of demographic change in their own retirement plans, will be expected by employees in many countries to fill the gap in health and retirement benefits as the nation state retreats.
“To do this effectively, we believe that companies and employees need to revisit fundamental beliefs on how to prepare for and structure retirement,” said Dr. Deborah Cooper, partner in Mercer’s retirement business. “Governments are already moving in this area by removing default retirement ages or adjusting normal retirement ages. At Mercer, we are seeing movement on the corporate front, too. More clients are asking us to investigate phasing out traditional pillars of retirement like fixed pension benefits. Instead, they are interested in implementing new types of scheme design, like the workplace savings products in the UK.”
According to Dr. Cooper, “If you look beyond the overall percentage of the population that is “working age”, there can be offsetting positive factors. If the proportion of those of working age who are in employment, or actively seeking employment, has increased, it will help mitigate the problem. Also, recently, the steady reduction in the age at which people leave employment due to age has slowed, and even reversed in some countries. It suggests that individuals are beginning to react to the increasing cost of retirement at existing ages.”
In the US, the implications of demographic change can be best illustrated by the 2012 edition of the Melbourne Mercer Global Pension Index. The United States ranked 8th of the 16 countries evaluated, and the report identified several steps to improve the pension system:
  • Raising the minimum pension for low-income pensioners
  • Adjusting the level of mandatory contributions to increase the net replacement for median-income earners
  • Improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement
  • Reducing pre-retirement leakage by further limiting the access to funds before retirement
  • Introducing a requirement that part of the retirement benefit must be taken as an income stream
“Emerging economies face their own challenges,” concluded Mr. Noonan. “Will their populations get old before they get rich? Will they follow the developed world down the dangerous path of unsustainable social security systems? China, in particular, will be interesting to watch, as their ‘one child’ policy has accelerated the aging phenomenon there. Certainly the high saving rates amongst the Chinese population at large point to concerns about the security of both state and company offered provision.”
“Demographic change will also have implications for workforce planning,” concluded Mr. Noonan.
“An older workforce also means an aging clientele. Will an older sales force relate better to the retail customers of the future? Certain industries are already facing talent shortages for key skills due to the retirement of seasoned professionals. Strategies that include mentoring the younger cadre and allowing greater flexibility during the transition to retirement can make a material difference to the bottom line for affected organisations.“
About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit Follow Mercer on Twitter @MercerInsights.

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