Retirement security globally is under increasing pressure, as inflation, a volatile market environment and low interest rates impact retirement pots, according to Natixis Investment Managers’ 2022 Global Retirement Index (GRI).
GRI is a multi-dimensional index, designed to examine the factors that drive retirement security, combining key indicators essential for people to enjoy a healthy and secure retirement.
This year’s index reveals that 2022 could be one of the worst years to retire in recent memory, as retirees risk not only taking retirement income from an already depleted pool of assets, but as they will have to take on greater risks with portfolios to make up the ground already lost.
The GRI includes 18 performance indices, grouped into four thematic indices which cover key aspects for welfare in retirement: the material means to live comfortably in retirement; access to quality financial services to help preserve savings value and maximize income; access to quality health services; and a clean and safe environment.
Inflation’s immediate threat
For most of the past decade inflation has been exceptionally low.
Between 2012 and 2020 inflation for the 38 OECD member countries averaged just 1.76%. However, in the first half of this year, inflation rose for those 38 countries, spiking at 9.6% in May 2022.
Significant price rises for oil, food, and housing are reducing the purchasing power of retirees and presenting a core economic lesson to those planning for retirement.
Andrew Benton, head of northern Europe at Natixis IM, said: “While inflation has a negative impact on individuals, certain institutions may see an indirect benefit. Pensions generally perform better in inflationary times as central banks implement interest rate hikes to curb inflation.
“This is because of the seesaw effect that rates have on pension liabilities. In simplest terms: the higher the rate, the lower the liabilities.
Benton said now with rates increasing, liabilities are shrinking for many.
“The math on inflation ultimately works out for the better for private pensions. With inflation driving rates up and liabilities down, these managers generally see their contribution rate decline. On the public side of pensions, the math may not be as advantageous,” he said.
An increasingly challenging picture
The OECD projects the over-65 population will increase from 17% to 27% by 2050, up from 17% in 2019, increasing the strain on retirement security, and putting additional pressures on healthcare and long-term care systems.
Even regions with young populations could soon face challenges as improved nutrition, healthcare and environmental factors contribute to longevity and low birth rates help push the overall population ever older. This is the case in both China and Latin America in 2022.
Ageing populations present limited choices for policy makers, especially as retirement and health benefits will have to compete with the need to pay off public debt, which has ballooned to $226 trillion among advanced economies as of 2020.
To make up for the funding shortfall, policymakers may have to choose one of the following options, none of which is popular amongst voters: raise income tax, raise the retirement age, or reduce benefits.
Benton added that the challenges that are being faced now and in the future are clear.
“Getting retirement right and helping to ensure individuals can live with dignity after their working years is a core sustainability issue for society. Difficult decisions will have to be made as policy makers strive to reconcile balance sheets with commitments to public retirement and healthcare benefits,” he said.
“Success will require a concerted effort from not only policy makers, but employers, the financial services industry, and individuals. It all starts with understanding the risks.”
