Michael Aguirre, The New York Times, 22nd December 2010
In 2009 the small Alabama city of Pritchard, outside Mobile became the first city in America to stop paying pensions to its retired workers.
For years the city had been warned that if it did not put more money aside its pension fund would run dry. It was even ordered to do so by the State court.
The City Mayor ignored the court order, deciding it would be better to keep hospitals open, street lights on and paying teachers’ salaries. The additional money to fund the city pension liabilities simply didn’t exist.
Many of the affected retirees have now filed for bankruptcy or gone back to work
This is the future across the developed world.
Private sector workers in rich countries already know the days of defined benefit pensions on retirement are long gone.
Employees in the private sectors have realised that they are in charge of looking after their own retirement. Their existing employers will contribute something but are in no way responsible for providing a comfortable income on retirement nor will they backstop the performance of their private pension fund.
The big change over the next couple of decades will be in the public sector.
This will be the inability of rich world governments to fund their public sector employee pensions.
Governments across the rich world have already accrued gigantic unfunded pension liabilities, the majority of which are of the defined benefit kind (i.e. guaranteeing a pension based on final salary). In most cases these future liabilities are not even included in national debt figures.
The slow realisation by both governments and their state employees that the money to fund their retirements does not exist, will be one of the defining themes of the next 30 years.
This Global Perspectives white paper looks at the future of global pensions after the Detroit crisis & examines what it means for asset management:-
The future global pension crisis & what it means for asset management