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Retirement : major challenges on both sides of the Atlantic

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Pension systems on both sides of the Atlantic face major challenges, summed up under the banners of ballooning public-sector debt, slowing economic growth, low interest rates, rising life expectancy and shrinking working population.

The financial crisis resulted in a dramatic surge in public-sector debt. But the full scale of the problem only becomes apparent when unfunded government pension liabilities are included in the calculation. On this basis, analyses show that public-sector debt could soar to over 500 percent of GDP in a number of European countries and in the USA. “Neither in the USA nor in Europe will economic growth suffice to get a grip on the problem of public-sector debt, as economic growth is set to be moderate for the foreseeable future. There is no alternative to radical consolidation and a further revamp of welfare systems,” said Michael Heise, chief economist at Allianz.

Demographic trends will push up the share of over 65-year olds in the overall population to 27 percent in Europe and 23 percent in the USA by the year 2050. With life expectancy rising further and the working population set to grow only marginally in the US and actually fall in Europe, government pension systems still have the biggest test ahead of them.

While the average US retiree can still count on a stable retirement income, future retirees will face new challenges as the global economic crisis has strained pension systems and savings income on both sides of the Atlantic. On average individuals retire at 62 years in the US and draw more than 40 precent of their income from social security. In the future more than 30 precent of retirees are expecting to continue working past their official retirement age. For them, social security will cover just 28 percent of their income, while costs of living, driven by high healthcare costs, will keep rising. Another often overlooked factor is longevity. Today Americans have come to fear outliving their retirement savings more than death itself, the Allianz Life “Reclaiming the Future Study” found.

“Longevity is one of the most underestimated risks in retirement income planning. In fact, longevity risk ranks higher than inflation risk” said Jay Ralph, Member of the board of management of Allianz SE and responsible for NAFTA markets. The recent crisis has shaken consumers’ trust in the funding of public pension systems. According to the Allianz Life study, Baby Boomers in the US think it is at least as likely that they will be hit by lightning as that they will collect their full due in social security savings in the future. More than 75 percent of people surveyed think that they cannot rely on the Government to protect their financial future. “Responsibility for managing retirement has increasingly been shifted to the individual and not all are prepared to actively manage their retirement finances – it can be an overwhelming task.” Ralph said. The study’s findings also show that consumers have new priorities when looking at retirement products: Safety and long-term protection of retirement assets are more valued than high returns. While investment oriented retirement solutions are important, most are designed to only last 20 years, creating a major income gap in old age.

Source : Allianz Press Release