Retirement security is being challenged worldwide by aging populations, low interest rates, shrinking government revenues, and growing pension deficits. At the same time, three in four investors worldwide say they now feel the responsibility to fund retirement is increasingly on their shoulders.1
To delve into global economic trends effecting retirement, along with factors investors may want to consider, Natixis retirement specialist Ed Farrington recently sat down with Chief Market Strategist David Lafferty and Chief Economist Philippe Waechter. They also address key findings from the 2017 Natixis Global Retirement Index, which seeks to provide a measure of how well retirees are set up to succeed across the developed world.
Farrington: Growth is a critical component in retirement investing and retirement security. What are the long-term prospects for economic growth?
Waechter: What we see in countries like Italy, Japan and Germany is that employment growth is slowing, or will slow in the future, because of aging populations. With low productivity growth, and low employment growth, it will be difficult to have strong momentum on gross domestic product (GDP). That’s the reason why we all expect that new technologies will boost growth in the future. The main issue is that we don’t know when this change will arrive – if it arrives. This uncertainty is very disturbing when we think about the retirement scheme. If we are not able to create a stronger growth, it could be a problem for people who are working and for retirees. That’s a real issue now for every developed country.
Lafferty: At its most basic level, retirement planning is about the deferral of assets for future consumption. It doesn’t matter if this is the government setting aside assets, or pensions setting aside money, or individuals setting aside money – in all three of those ways, you need higher growth rates to make that math happen. However, it’s very hard for people who are just getting by to even justify saving in the first place. Never mind how much they’re going to save, or how fast it’s going to grow.
Farrington: Let’s talk about demographics and economic growth. Baby Boomers have driven growth for 50-plus years and are getting older and living longer. The Millennial population is larger – but their impact hasn’t been felt yet. Is the problem simply that there are too many people getting too old, and not enough people behind them?
Lafferty: People are living longer, so the dependency ratio – or the number of non-working age dependents versus working-age people – is poor. Also, studies show that productivity is higher among older workers. They’ve been trained, they have experience, and they know what they’re doing. Newer workers are likely going to have lower productivity. As experienced workers leave the workforce, it becomes another source of pressure on productivity, which is so important to getting up these long-term growth rates that we need.
Waechter: When we think about retirement funding, we all have the past in mind but we mustn’t imagine that the productivity growth and income flows seen by our parents and grandparents will come back. In the mid-1950s, retirement was easier in Europe, where Social Security was organised differently, and we had very high pensions. Current productivity is low everywhere – too low to go back to this type of trend or to create the surplus that once allowed us to transfer wealth to the future. One way to manage it might be to increase the retirement age, but that could be very complicated, because we have to create incentives for young people to work and to fund retirees.
Farrington: If retirement ages are raised, would the global economy be able to support older people working in it?
Politically, it’s hard to tell people that they’re going to have to work longer. It’s not a ‘vote-getter.’ It’s also tough to overcome demographics; you can’t exactly change birthrates all that quickly. But there is something that mitigates an ageing workforce – immigration and labor flexibility. We see this issue showing up in three places right now.
In the US, much has been made about President Trump’s proposals on limiting immigration and the potential drawbacks they present. You don’t have to look any farther than Silicon Valley, where they are very much against this, because there is a dearth of highly skilled engineers and computer scientists that Silicon Valley needs. In Europe, one of the biggest issues within the Brexit withdrawal process is going to be workers’ rights and the status of workers between the EU and UK. We have lots of Brits working in Europe, and lots of Europeans working in Great Britain, and we need some stability to their worker status. They need that flexibility to move back and forth where the most appropriate opportunities are.
Japan is also dealing with these issues. They have historically had a fairly closed society with very limited immigration. In the last couple of years, they have realised that they have to open up and create some labor flexibility both through immigration and bringing more women into the workforce.
Farrington: Interest rates have been low for a very long time, which has significant implications for individuals in retirement and individuals saving for retirement. How are interest rates affecting retirement security?
Waechter: Many investors preparing for retirement imagine that high interest rates will feed their savings and build their assets for when they reach retirement. But in many countries, real interest rates are close to zero and in some cases negative. So, we are linked to a situation where accumulation doesn’t create a snowball effect.
Lafferty: Interest rates present a conundrum. If interest rates are higher, individual investors see their bond portfolios face a capital loss in the near term. But the positive is, they earn the higher interest rate into the future. In the long run, higher interest rates are good for retirees. Institutional investors understand this, because they have explicit liabilities. An understanding of their retirement liabilities is probably the single most important thing that a financial advisor can offer to a client. When interest rates back up, their bond portfolios may struggle, but the present value of their liabilities falls, so their funding tends to improve.
Farrington: Our research with institutional decision makers shows that six in ten say that most institutions are going to fail to meet their liabilities.1 Is there a solution to this?
Lafferty: Economics is about choices in a world with limited means. To me, a lack of leadership is the greatest threat to global retirement security right now and rears its ugly head in a lot of ways; the US, Brexit, austerity in Europe. If you don’t have a lot of strong leaders, you’re stuck with these really challenging economics in place right now – interest rates, poor dependency ratios, low productivity, etc.
Waechter: We will have to do things differently. If we continue to have this low-growth environment with low interest rates, we will not be able to balance all our retirement schemes. Will innovation result in higher productivity? That is not the case for the moment. Innovation is everywhere except in growth statistics. That’s why it’s complicated now and that’s why retirement should be a real concern for every one of us.
1 Natixis Global Asset Management, Global Survey of Institutional Investors conducted by CoreData Research in October and November 2016. Survey included 500 institutional investors in 31 countries.
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Published in August 2017