Bridging the retirement divide: Insights from the International Pension Gap Index
Disparities in global retirement systems highlight the importance of early savings and investment strategies for securing financial stability in old age.
The International Pension Gap Index, a comprehensive report by UBS Global Wealth Management’s Chief Investment Office, shines a spotlight on the disparity in retirement systems across the globe.
It assesses the mandatory components of 25 different retirement systems, focusing on the benefits workers can expect and the additional savings required to maintain their standard of living post-retirement.
A wide range of savings efforts
The study reveals vast differences in the retirement savings effort required across cities. In some places, like Amsterdam, private savings are almost unnecessary, while in Tokyo, saving 93% of one’s wages would be required— an impossible feat for most workers.
These differences stem largely from how each system is designed. For instance, Japan’s system doesn’t aim to replace a high percentage of a worker’s income, unlike the Netherlands, where retirement contributions are higher but so is income replacement.
Additionally, cultural and demographic factors play a role. Japanese workers, for example, spend 50% more time in retirement than their Dutch counterparts due to earlier retirement and longer lifespans, further straining personal savings.
A global reality: Personal savings are key
The need for personal savings to maintain a post-retirement standard of living is a reality for most of the world. But how much each individual must save depends heavily on the design of their country’s retirement system.
Some systems offer substantial benefits that require minimal personal contribution, while others rely more heavily on individual responsibility. These systems often do not prioritize maintaining a retiree’s accustomed lifestyle, leaving much of the financial burden to the individual.
The uncertainty of retirement benefits
Even in systems where retirement benefits appear promising, there are no guarantees. Many benefits depend on financial market performance or outdated demographic data, particularly in defined benefit schemes, which are increasingly out of sync with actuarial realities.
As the baby boomer generation retires, this issue becomes even more pressing, as pay-as-you-go systems could leave current workers shouldering a greater financial burden.
UBS economists caution that precautionary savings are critical to protecting against policy changes that may reduce benefits.
A path to sustainable pension schemes
However, there are examples of pension systems that have addressed these financial challenges. Sweden’s Income Pension, for instance, incorporates a sustainability backstop that adjusts pensions based on the financial health of the system.
"Looking at what has been implemented in some countries shows us that increasing the resilience of retirement systems without compromising on adequacy is possible," says UBS economist Elisabeth Beusch, highlighting that reforms are achievable and effective.
Planning for retirement: A growing necessity
In many cities, the savings required to maintain an accustomed lifestyle in retirement can far exceed what the average worker can realistically set aside.
Faced with this reality, individuals may need to make tough decisions, like reducing their lifestyle expectations or retiring later. However, these uncomfortable choices can often be mitigated by starting to save earlier in life.
Investing is another key strategy that can significantly reduce the savings burden. The UBS report shows that in Switzerland, a diversified portfolio of bonds and equities typically outperforms cash savings, improving financial outcomes in retirement nine times out of ten.
As UBS economist James Mazeau explains, "Far from being reckless, investing savings in view of retirement can help workers maintain their accustomed lifestyle in old age."
Should women approach retirement differently?
While retirement systems are typically gender-neutral, in reality, women often face greater challenges. Many women take career breaks or work part-time to care for children, leading to slower wage growth and fewer retirement benefits.
Compounding this issue, women generally live longer than men, meaning they must stretch fewer resources over a longer retirement period. As a result, the report finds that women often need to save more than men to secure the same quality of life in retirement.
The International Pension Gap Index serves as a wake-up call for governments, businesses, and individuals alike, highlighting the urgent need for thoughtful retirement planning. While the challenges are significant, the solutions are within reach, provided we take the necessary steps early and understand the varying demands of global pension systems.
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