Can countries with well-developed private pension systems afford to worry less about the aging of their population? (Roger Planje, Tilburg, the Netherlands)

Having well-funded and managed private pensions is clearly beneficial and strongly preferred to the alternative! Yet the biggest challenge of an aging world is still the million-ton gorilla of healthcare and long-term care costs, which aging nations have yet to acknowledge, much less manage and finance.

What are the main retirement issues we American Baby Boomers should be aware of? (Jane Schutt, Fresno, CA, USA)

Baby Boomers all over the world are subject to many risks, key among them the risk of running out of money too soon and the risk of high healthcare costs. In the US, these problems are exacerbated by the prospect of near-term Social Security insolvency and the even greater threat of Medicare costs which are growing faster than inflation. No one yet knows how and when politicians and the voting public will resolve these deep threats to retirement security. Accordingly, my advice to friends and family is - delay retirement as long as possible - and keep working on some job as long as you can. Every year that one defers retirement is an investment in peace of mind for one’s 100th birthday!

The risk/return profiles of those who approach retirement vary widely, which might put financial markets under pressure: is this good or bad?

In the past, retirees were generally advised to hold mostly “safe” assets such as nominal bonds.Now it is clear that these are far from safe, as they are not inflation-protected. In the future, retirees are more likely to demand inflation-linked assets, as well as annuity products to help protect them against running out of money in old age. I am not terribly concerned about the possibility of an “asset meltdown” purported to occur when Baby Boomers sell off their equities in one fell swoop, as I don’t see Boomers moving en masse in that direction. While the stock market downturn in 2000 did serve to remind many of equity risk, many retirees still acknowledge that they can benefit from an element of equity exposure in retirement.

I just retired after working in seven different countries in three continents, and am having difficulties receiving full pension entitlements. Is there any international organization addressing this increasingly sensitive issue? (Marco Benatti, Milano, Italy)

This is a critical problem which the EU and the international entities more broadly should be addressing, but it is also one on which politicians have been dragging their feet. The theory of the EU was that employees would find geography no obstacle to finding a job; the reality has been less satisfactory and today, national tax and benefit systems greatly impede this process. Some multinational firms handle this with offshore benefit plans for their managers, but there is as yet no satisfactory solution for the workforce as a whole. I expect that there won’t be, for some time to come, inasmuch as synchronizing pension and other rules requires sovereign governments to agree to unify rules for national social programs. In a few cases, treaties have been signed permitting pension credits to transfer, a notion which is far simpler under a defined contribution model than under a traditional defined benefit framework.

Many companies in the UK and US are facing operating and financial constraints because of pension liabilities. British Airways has been dubbed “a pension fund with some air transport operations”; General Motors is in trouble for similar reasons. What is the situation of companies based in continental Europe, where pension systems are mostly state-run?

Europe is experiencing the same pension stress as is the rest of the world, with pressures from a variety of stakeholders to “mark to market” the pension system liabilities as well as assets. Many of the older state-run defined benefit pensions in Europe are simple pay-as-you-go plans, which means they are financed from annual tax revenue. The stark fact is that lower fertility rates and low/negative population growth throughout much of Europe will require ever-higher taxes to pay for those promises. Sensible alternatives will involve raising the national retirement age, indexing benefits to rising longevity, and probably some additional means testing and benefit cuts.

Are emerging countries endowed with comprehensive social security systems? Do you think that 25 years from now these countries will have to face the same problems developed countries are currently facing? (Lee Ching Yen, Singapore)

The sad fact is that many emerging economies are just as old as the developed economies, so that they don’t have the luxury of waiting 25 years to figure out how to sort out the challenges of population aging. One of the most important examples of this is China, which has had very low fertility rates and rapid aging for some time. Fortunately, its economy has been growing rapidly, but the challenge of caring for its elderly will be a major social and economic problem for China and many developing countries in the near and medium term.

Would you please hint at the latest new ideas in retirement research?

There is a great deal of interesting research on annuitization and pension fund investment; we also have some fascinating new work on CEO pensions and on financial literacy and planning for retirement. Interested parties should visit our webpage The Pension Research Council and download our working papers (for free registration).

Are company retirement plans a key element to attracting skilled workers? (Samuel Deer, Cambridge, UK)

Economists note that there is generally a tradeoff between wages and non-wage benefits including pensions, with the balance determined in large measure by workers’ tastes for one versus the other. Forty years ago, the defined benefit pension model suited many employees – particularly those who remained with a single employer for life – so that firms wanting to attract and keep a reliable workforce elected those. In modern times, however, defined contribution pensions have taken the place of defined benefit pensions. They appeal to workers in providing benefit portability, a tax-protected buildup, and investment choice. Bottom line: the type of benefits offered by employers can play a role in workforce attraction and retention, but benefit offerings must evolve with the labor market.

In your opinion, what will the global size of pension funds be ten years from now? Will they displace mutual funds as the main form of asset management?

One force shaping pension and mutual funds of the future is global population aging, implying that the accumulation process will slow down and even turn down, as retirees begin spending their accumulated assets. On the other hand, younger workers are now more able to save via pensions and mutual funds compared to the past, which enhances their use among some who previously would not have had investments outside of bank accounts or perhaps a house. So these represent countervailing trends. Another key financial player must also be mentioned, namely insurance companies, who will also play an increasingly important role in helping manage retiree’s longevity risk.