The 'shock' that awaits pensioners at retirement

US flag and pensioner in wheelchair Image copyright Getty Images
Image caption Heading for the exit. Americans - and pensioners in many other countries - will be shocked at how little they have to live on in retirement

The next generation of Americans to hit retirement will be 'shocked' when they find out how little they have to live on.

A former Assistant Secretary of the Treasury warns that the US government is standing idly by. "We need to do something, we're not doing anything," she says.

Professor Alicia Munnell, who is now director of Boston College's Centre for Retirement Research, tells BBC World Service's In the Balance programme that most Americans' voluntary 401(k) pension schemes are seriously under-funded.

In a new book, Falling Short, she says the only answer is to work longer and save more.

But it is part of a bigger global pensions gap between what is needed to fund pensions and what is actually available in private and public pension pots.

America's 401(k) was introduced in 1978 as a tax-efficient way of encouraging individual citizens to save for retirement.

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Image caption No laughing matter - but if people put off retirement until they were 70 they would be in 'good shape', says Prof Munnell

But the average 401(k) fund, to which individuals and employers contribute, stands at $111,000. That's about enough to provide just $400 (£256) a month in retirement.

'We need to pay more'

On the streets of New York, we questioned people on how confident they were about their retirement income.

"I'd say fairly-to-very confident," says Mark, aged 53 from Boston. "I think we've done our part, put as much dough aside as possible.

"In the next five to seven years we should be able to save even more - we'll have to."

However, Prof Munnell says the first retirees who are going to rely solely on their 401(k) are going to be "stunned" at how little that average $111,000 balance provides them in terms of monthly income.

"People are going to be shocked," she says.

Hannah, a 31-year-old New Yorker says: "I think it is getting to the point now in the economy where people my age are going to have to work until they die.

"I don't think social security is going to be able to do anything by the time I retire."

While Prof Munnell says that there will always be some kind of safety net in the US, "we need to put more money in to maintain current benefit levels".

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Image caption Who will pay for pensioners in China, as the old start to outnumber the young?

Defined contributions

Across the world company and public pension schemes are moving away from 'defined benefit' schemes.

These typically guarantee a pension equivalent to a proportion of a person's final salary, sometimes as high as two-thirds.

Instead they have moved to 'defined contribution' schemes where workers get out what they put in - plus, hopefully, some gains made by investing the funds over the years.

But not enough people are using the schemes.

"We have introduced 'auto-enrol', which is where people are assumed to be putting money into a small personal pension unless they deliberately opt out," says David Willetts, MP, a former shadow pensions minister in the UK.

"It's not compulsory but it's a powerful nudge. The bad news is these provisions are not going to be enough."

And private pension pots don't always catch on.

Monika Queisser, head of pensions policy at the Organisation for Economic Co-operation and Development (OECD) explains how there has been a "reticence in many populations," who believe that "this is like putting your pension in the casino, [it's] too dangerous, there is too much risk.

"And since private pensions also entail administration costs people are looking very closely at returns - and saying they don't think they should be putting their money there."

Later retirement

Prof Munnell says that with the 401(k) scheme only covering half the US workforce she would love to see automatic enrolment.

People should also work longer to put more into their schemes, she says.

"If people put off retirement until they were 70, then they would be in good shape."

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Image caption Still working after all these years - working longer is one way to bridge the pension gap

So, faced with a reluctance to save through private pensions, most governments outside the US are getting workers to save for longer instead and imposing later retirement ages.

In countries such as China, Italy, Greece and Germany pension ages have been raised, although the pill has been sugared slightly by pegging retirement to the length of time workers have paid into a fund, rather than their actual age.

The bottom line is: People have to pay more.

The python and the pig

The pension problem is particularly acute in countries where there has been a massive decline in fertility rates and simultaneous rises in life expectancy.

David Willetts describes the phenomenon as being like a "python trying to swallow a pig," as the large numbers of one generation reach working age first and then retirement age - while the smaller numbers of the succeeding generation struggle to pay for them.

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Image caption South Korea is seeing a pensions crisis born of a massive decline in fertility rates and simultaneous hikes in life expectancy

South Korea is a good example of this phenomenon, says the OECD's Monika Queisser. It is, she says, "the OECD's second youngest country but in a few decades will be the oldest country.

"Korea... doesn't have a long standing pension system. And we have a long standing problem of old age poverty there already, and it's not going to get any better."

There are other, more informal ways in which individuals will try to pay their way.

Prof Munnell suggests that people could also use equity in their homes to finance their pensions.

"For most middle class people their house is their major asset, and to date people have not wanted to tap into their home equity at all.

"They want to leave their house to their children. Given the situation now that is no longer going to be possible."

Eating your house

However, this will not always work, warns David Willetts.

"You can 'eat your house' but 'eating your house' probably won't deliver quite as much income as people hope," he says.

"I think we do have this problem with people imagining they are going to have a better income than their current savings would predict."

But it may soon be in the interests of employers to give more generous pensions, he says.

"We are all going to be working longer and there will come a point when the company wants to reorganise itself and create opportunities for younger employees.

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Image caption The world is aging rapidly and there will be fewer young to pay for the elderly

"It will try to get its 70-year-old employees to leave, and will find that to get them to leave it will have to give them a nice fat departure payment."

How much do you need?

So, once you have finally made it out the company door, how much do you actually need for your retirement?

In the UK, Tom McPhail, head of pensions research at Hargreaves Lansdown, explains how much would be needed to provide a decent income for an average wage earner.

"Let's take someone in the UK with a typical earnings of £30,000 ($50,000) a year. They may want to look for a pension of £20,000 a year.

"In order to do that they are going to have to build up a pot of money of £300,000, roughly $500,000. In order to do that someone starting saving in their twenties is going to to need to save 12% of their income.

"The problem is many people have missed that boat. They are in their thirties and they still haven't started saving, so the saving rate for them is going to have to be 15-20% of their income."

You can hear In The Balance's discussion on the global pension gap 08:32 GMT on Saturday, 3 January, 2015 here on BBC World Service.

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