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World Bank Sounds Alarm on Pension Crisis

Leo Kolivakis's picture




 


Submitted by Leo Kolivakis, publisher of Pension Pulse.

Bill Tufts, publisher of the blog Fair Pensions for All, gave me a heads up that the World Bank released a report on Tuesday, Financial Crisis Hits Pension Systems in Europe and Central Asia:

The
financial crisis has significantly impacted pension systems in the
countries of Europe and Central Asia (ECA)* and many of the governments
have been tempted to make policy changes in response to the increased
pension deficits, says ‘Pensions in Crisis,’ a World Bank Regional report released today.

 

But
despite the severity of the crisis, it pales in comparison to the
demographic crisis which the region will face, and World Bank experts
urge countries in the region not to make any policy changes focused on
addressing short-term fiscal concerns that make the long-term even
worse.

 

The new report analyzes the impact of the financial
crisis on pension systems of ECA countries, reviews the initial policy
responses by individual governments, and provides recommendations on
how to strengthen pension systems in the region both in the short- and
long-term. World Bank experts concluded that though pension systems in
ECA come in all shapes and sizes, no pension system, however well
structured, proved immune to the crisis.

“The
financial crisis affects each component of a pension system
differently, and while magnitude and timing may be different, each
component is adversely affected,” said Anita Schwarz, main author of
the Report and the World Bank Lead Economist in the Europe and Central
Asia Region. “Sharp falls in output and reduction of the overall tax
base reduced public funds available for pension systems, while at the
same time growing unemployment, drops in wages, and depreciation of
financial assets negatively affected systems financed by worker and
employer contributions.”

 

The new study finds that ECA
countries, once hit with a sudden shock to the fiscal balances of their
pension systems, started considering and implementing policy changes
that both increase resources and cut expenditures. The report warns
policymakers that actions which generate short-term benefits may
involve additional costs in the future. According to one simulation,
even the most severe scenario of the financial crisis pales in
comparison with the effects of the demographic crisis that is looming
in the region.

 

“It is alarming to
look at what the Europe and Central Asian countries are soon to face as
the region continues to age,” said Schwarz. “Future pension system
deficits can be threefold than what is currently expected, and are
expected to remain at that level for more than 20 years before slightly
improving. Policymakers need to use the opportunity of the current
crisis to address long-term issues, which could bankrupt pension
systems precisely when the numbers of people who need them are growing.”

 

Given
the diversity of ECA countries, there is no one blueprint for reforms.
Broadly, the report recommends – depending on the country – a
combination of measures, including moving to inflation indexation of
pensions after retirement, increasing the retirement age and equalizing
the retirement age of men and women, and reducing early retirement.

 

In
addition, it suggests provision of better insurance against the
volatility of financial markets, and calls for the acceleration of
regulatory and supervisory reforms that will allow pension funds to
earn better rates of return along with further development of capital
markets. Finally, it urges governments to promote awareness among their
citizens that public pensions will need to be less generous than in the
past if they are to be sustainable.

You can read the full report by clicking here. There is also a summary of the report available here. I quote the following:

Policymakers need to be cautious that their response to this crisis does not exacerbate the next one.

In
past crises, governments have responded to rising unemployment by
loosening early retirement and disability restrictions. Increased
retirement now will shift the baseline deficits even higher as
potential revenues decline and expenditures rise.
Raising
contribution rates in some types of systems raises liabilities for the
future. Transferring second pillar contributions to the first pillar
also involves an increase in future liabilities for the first pillar.

As
I have stated before, the global pension crisis will unleash a serious
demographic deflationary wave on the global economy. Uncle Ben and
other central bankers are in for a long, tough slug ahead. That's why
they're doing everything in their power to spur asset inflation and
hopefully limit the damage as much as they can. I wish them luck,
because when it comes to the pension crisis, they're truly pushing on a
string.

[Note: Read Tom Croft's comments on dark pools at the end of my last post of seeking alternatives.]

 

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Wed, 12/09/2009 - 15:43 | 158165 Anonymous
Anonymous's picture

for the US, didn't Geo Bush propose to fix the gov't Social Security retirement scheme? what happened on that?

Wed, 12/09/2009 - 14:54 | 158118 Anonymous
Anonymous's picture

A friend took a trip to Greece recently and said everyone has solar panels on their roofs. Sounded smart to me.

Wed, 12/09/2009 - 15:59 | 158183 Leo Kolivakis
Leo Kolivakis's picture

If Greek politicians had any vision, they would team up with the Chinese and develop renewable energy projects in Greece. It won't help them short-term but long-term they need a new game plan.

Wed, 12/09/2009 - 14:42 | 158100 Anonymous
Anonymous's picture

That's why I'm going to Katmandu.
I'm really really really going too.
If I ever get out of here.
That's what I'm gonna do.

Wed, 12/09/2009 - 11:56 | 157891 tip e. canoe
tip e. canoe's picture

note to leo: the world bank is not your friend.

consider the reason why they are pushing this meme at this point.

Wed, 12/09/2009 - 13:05 | 157973 Leo Kolivakis
Leo Kolivakis's picture

Please expand your thoughts on why they are "pushing this theme". You think it's to cover something else?

Wed, 12/09/2009 - 13:57 | 158022 GS is short Gold
GS is short Gold's picture

Kolivakis, let me guess. You think everything is fine and dandy in your native country of Greece as well.

Wed, 12/09/2009 - 15:55 | 158053 Leo Kolivakis
Leo Kolivakis's picture

Perhaps you should go back and read my comment on putting the citizen first. Greece has many problems, the least of whiich is a bloated public sector and pension system. The news in Greece you are now witnessing is way overblown. As a friend of mine commented, Greece will be publicly scolded but privately bailed out:

.....EU's Economic Affairs Commissioner Joaquin Almunia called Greece a "common concern" and offered help to design the necessary fiscal consolidation program, but did not commit to a blank check for Greece.

Having said this, Greece is on its last legs and wil have to follow Ireland and cut spending to contain deficit, restore confidence.

Wed, 12/09/2009 - 13:44 | 158013 Anonymous
Anonymous's picture

Leo;
Who's in charge of the World Bank? Answer that and connect the dots!

Wed, 12/09/2009 - 14:19 | 158061 Leo Kolivakis
Leo Kolivakis's picture

The US & the UK were instrumental in founding the World Bank so I guess you're saying they are pushing this theme to perpetuate the pension Ponzi scheme?

Thu, 12/10/2009 - 08:06 | 158773 tip e. canoe
tip e. canoe's picture

leo, some clues (note that i don't have any answers, only questions):

if you are willing to consider that pensions are indeed a pyramid scheme, then note how that particular pyramid is interlocked with other pyramids all nested within one larger Pyramid.  also note the intense intent to add another pyramid (carbon) into the Pyramid.

note how the world bank seems to be appearing with more frequency in the memesphere recently (obama's afghan speech last week, copenhagen, etc) (and notice how the IMF has fallen off the radar)...consider whether this is a coincidence...or not.

what is interesting i think to consider is how wealth will be siphoned out of those individual pyramids (in this case, pensions) into the new pyramid with the pensioners' consent.

Wed, 12/09/2009 - 11:56 | 157889 Anonymous
Anonymous's picture

Actuaries assume the present generation that's about to retire will survive as long as the previous ones.

When governments take a good look at their liabilities, they
will fund research on some epidemic to target those useless
old baby-boomers.(and I am one)

Voila! problem solved

Wed, 12/09/2009 - 10:58 | 157792 Anonymous
Anonymous's picture

I'm afraid that, in the U.S. anyway, the problem is much worse and much more complicated than even the bearish comments here indicate. Public pension obligations are completely removed from any managerial "discretion". They are GUARANTEED BY LAW, EVEN if the responsible entity (state, municipality, etc.) becomes insolvent. You might argue that this situation is completely at odds with all logic--and you'd be right. We are thus setting up for a showdown of epic proportions: truly, the haves VS the have-nots, with the have-nots stuck with the check (!). How this circle will be squared is anyone's guess, but I don't see how this will be anything but the Mother of All Clusterf*cks...

Wed, 12/09/2009 - 14:30 | 158077 Anonymous
Anonymous's picture

You're naive. The same people that guaranteed them by law can very quickly and easily pass a new law that removes the guaranty. That's exactly what will happen. It's not a crisis. Those due the pension will get screwed. The end.

That said, God must be laughing at the hubris of man. We build our economic system in a manner that relies on future generations to pay for our comfort in old age, and then instead of procreating within the framework of a family, we indulge our perversions, our coke-addled brains too fried to draw the very straight line between cause and effect.

It's almost too funny for words. What goes around comes around. We're about to reap what we've been busy sowing for the last 30 or 40 years. If you've been having fun, it's a bit late to start complaining now.

Wed, 12/09/2009 - 12:03 | 157900 trav777
trav777's picture

does this mean that Happyjoyfun "growth" is intractable?  Plz say it ain't so...

Wed, 12/09/2009 - 10:55 | 157787 trav777
trav777's picture

ponzis, all...corporations did the same thing with excess pension payins as the .gov did with SS.  They goosed the bottom line EPS and paid themselves performance bonuses based thereon.

 

Exponential growth is the problem.

Thought question - you have a bottle with one bacteria in it at noon, it's full at midnight, the bacteria double in population every minute.  At what time is the bottle half full?

The point is that finite headroom constraints come out of apparently NOWHERE.  If you take 10 doubling intervals prior to capacity, you have 1/2^10 of the ultimate system capacity...nothing but empty bottle as far as the eye can see.  Anybody sounding the alarm about the unsustainability of the growth rate would be laughed at as a fool because less than 1/10 of 1% of ultimate capacity is currently used.

The wise man conned the Indian king in the old parable of the rice grains and the chessboard with the same doubling con.

The problem is that, psychologically, humans are *incapable* of understanding exponential growth.  Perhaps this is a function of normal IQ versus genius level because it's never posed much problem for me but most people cannot do simple multiplication in their heads and we all remember kids in school counting with their fingers.

A recent psychological study showed that ordinary people tend to find two points on an exponential curve and then conduct a linear interpolation of that rate of change into the future, where they end up so grossly under where the real value is that it makes a fool out of them.  The exponential, OTOH, is its own rate of change at any given f(x)

Wed, 12/09/2009 - 15:04 | 158132 dnarby
dnarby's picture

Ever watch a teller make change w/o the cash register lately?

Most people can't do four digit addition and subtraction in their head.

Wed, 12/09/2009 - 12:50 | 157951 Misthos
Misthos's picture

Excellent point - I agree.  Pension funds need exponential growth to function longer than a mere 2-3 generation span.  In a finite world, incapable of supporting exponential population growth - that is impossible. 

Population shifting - relaxing immigration standards is a mere bandaid that keeps the Ponzi scheme going a little while longer.

Wed, 12/09/2009 - 10:26 | 157732 Anonymous
Anonymous's picture

The World Bank, Denmark, UK, and the US (Obama). Just got caught trying to pull a fast one in Copenhagen.

Wed, 12/09/2009 - 10:20 | 157724 Anonymous
Anonymous's picture

I think the pension problems pale in comparison to what is going to happen as millions of American seniors (and younger)the vast majority of them in the FPS category (flaccid pieces of shit)show up and demand to be kept alive at any cost. Most of them have been trying to kill themselves with drugs, alcohol, food, and tv for the last 50 years and will now turn to a criminally greedy medical system to be granted a few more days of "the biggest Looser" If the system remains as it is we'll spend a million bucks apiece to put the boomers to rest. Sorry, I guess this is one of those topics we cant talk about and that's great news for the medical gangsters.

Wed, 12/09/2009 - 09:54 | 157707 Anonymous
Anonymous's picture

There is no solution save poverty for most of 'yesterday's people'. If you didn't save enough to provide for your own old age ( and that is no guarantee the government won't seize your nest egg) you will have no choice be to rely on public charity in an era of shattered government finances, resource scarcity and a burgeoning underclass.

We'll probably have to build 'pre nursing home style barracks to warehouse our destitute seniors as the baby boom marches off into eternity.

Wed, 12/09/2009 - 09:30 | 157695 Anonymous
Anonymous's picture

it won't be too many years before your national identity card enables you to shop at a subsidized government supermarket (in size, not selection of goods) that is stocked with food grown on government farms using "volunteer" workers.

Wed, 12/09/2009 - 16:49 | 158242 Orly
Orly's picture

FEMA Camps are just a myth, haven't you heard?

Wed, 12/09/2009 - 09:20 | 157687 Anonymous
Anonymous's picture

heck, what about our pension system? you think their system is bad, wait until the proverbial stuff hits the fan about system. all those baby boomers waking up to a real bad dream....yep its coming here too i am afraid...

Wed, 12/09/2009 - 08:59 | 157683 Failure to Comm...
Failure to Communicate's picture

If governments at all levels had to handle pensions the way private employers do, they would all be bk under current law. Maybe the Pension Benefit Guaranty Corporation will cover them ?

'At the end of 2006, public pension plans were already underfunded by $361 billion, according to the Pew Charitable Trusts. That was before the stock market collapse, soaring unemployment rates and tumbling tax revenues dealt municipal finances another blow.'

http://money.cnn.com/2009/11/29/news/pension.pain.fortune/index.htm

Wed, 12/09/2009 - 08:57 | 157682 Anonymous
Anonymous's picture

you said "That's why they're doing everything in their power to spur asset inflation and hopefully limit the damage as much as they can. "

bullshit

They are simply facilitating maximum take by their masters, the banksters. Wake up.

Wed, 12/09/2009 - 10:24 | 157727 Anonymous
Anonymous's picture

agreed. it is the planned destruction of the middle class combined with the planned theft of their money. this will in effect, as you say, facilitate a take over. many will see it as the government simply trying to help. but slowly, things will get worse and worse and liberty will suffer. liberty is what is all about. liberty. freedom and liberty are things they cannot stand. so they push us in the corner. what will the americans do? that is the question.

Wed, 12/09/2009 - 10:17 | 157721 El Hosel
El Hosel's picture

Nice one Ano,

   "Wake up" is right. 

Wed, 12/09/2009 - 08:11 | 157673 exportbank
exportbank's picture

The demographic time-bomb is arriving at our front door now. Already there are public sector retirees that are pensioners for more years than they worked. In most countries these benefits are unfunded and must come out of current cash-flow (read increased deficits). Pensions along with health care costs will trump everything and if not immediately addressed will collapse the system. The main problem with any fix is that human nature won't allow it. 

Wed, 12/09/2009 - 03:25 | 157622 Anonymous
Anonymous's picture

Great depression will look like a walk in the park.

In fact, what they will say to Granny: why don't you go take a walk in the park....

like tonite here in Seattle, when its -6c.

Wed, 12/09/2009 - 03:04 | 157617 Anonymous
Anonymous's picture

Long ago, Daddy and Mommy told me to join the US Post Office or some really NICE employer and learn to enjoy the nice Pension system plus Social security and possibly income from military service to loll about my retirement home living large.

But first I must be loyal to the employer and show up to work every day, on time, in good health ready to do work hard.

Bleah. What a waste of time. It might have worked in the 50's and did.

Now we have elderly people who are still mobile go to work as a greeter because there isn't enough money to pay the house note... or to eat for the month. (Or buy medicines for that matter.)

Or rescue their suffering adult children who have no job, no home no nothing.

For a lucky few, these Pensions might actually be the only thing that keeps them solvent each month and out of the poorhouse.

Take away the Pensions? You are going to have trouble.

What they need to do is enforce the Pension payouts to the workers who are supposed to get them and make it happen.

Maybe the entire money system built by Man to entice the dumb worker fresh out of high school with filled innocent ways and pure motives given to them by their Parents who have enjoyed Pensions and life long employment to a AMERICAN Company.

What do you think is going to happen in 20 years when our young kindergarten graduate from High school and is issued a telemarketing job with a requirement that they make 300 calls per hour and a sales quota to be met .... oh

By the way, no benefits. Just a nice parking spot for a month if you do especially well.

Wed, 12/09/2009 - 02:25 | 157606 DoChenRollingBearing
DoChenRollingBearing's picture

At this point I think most of us (USA for sure where I am) now realize it is up to each of us to look out for our own futures and to doubt the promises of government pensions (or even company pensions, who knows how deep the lies lie!).

 

Moi?  I am beginning to think that I should just take out $500 from the ATM every time I pass by going home each day...  And then buy 1 toz. of gold (1 toz. US Gold Eagle) each week.  Trust any of these governments or companies to keep their promises?  Naah.

 

Be very cautious, almost paranoid, is what I think.  Keep some hard assets (precious metals) close, even closer than your enemies, LOL.

Wed, 12/09/2009 - 01:17 | 157575 the phantom
the phantom's picture

Leo- This is what I hear from friends and family in Europe; the retirement benefits, particularly for gov't workers, is unsustainable... as much as 70% of your final year's salary for the rest of your life are some of the stories I've heard.  Many countries are in big trouble.  When I talk to them about the housing bubble and the aftermath here, they tell me wait until you see the mess the pension will be for Europe. 

Wed, 12/09/2009 - 03:59 | 157632 Anonymous
Anonymous's picture

Not such a problem.
Whenever there is a blackhole in Europe, we just follow America's lead and print more money. End of problem.
We are just a little better at hiding our QE!!!

Wed, 12/09/2009 - 03:43 | 157629 A Man without Q...
A Man without Qualities's picture

Yes, the huge issue (and where it exceeds the US) is that these are totally unfunded obligations and the liability is far in excess of the listed debt.  It is, by any classical definition, a pyramid scheme, which demographically is looking like an inverted pyramid.  Add to this, the huge borrowing requirements and the fact these obligations are index linked (but the state does not buy annuities) means something has to give.  The UK and France are the ones with the biggest problem.  

You can see how bad it is from the pension problems that UK entities that were privatized in the last 20 years, such as BT or British Airways.  These same issues exist in the NHS, the Post Office, Education etc etc.

On the other hand, there are plenty of people who took state jobs with lower salaries than available in the private sector because of the benefits plans....

Wed, 12/09/2009 - 04:05 | 157633 Anonymous
Anonymous's picture

No. Its not that bad.
The major western European countries (Germany, France, UK) attract millions of immigrants from Eastern Europe. Additionally, a steady influx of immigrants from ex-colonies and further afield. This is because we offer better pay and better working conditions.
Our popuations are booming from this influx. More significantly, our demographics are improving (younger generations make up the majority influx). The contribution that these guys make to our tax receipts is huge.

Wed, 12/09/2009 - 11:52 | 157883 Anonymous
Anonymous's picture

Bringing in millions of unassimilable Muslims whho msotly go on the dole and commit multitudes of crimes while demanding that they be allowed to have Sharia law is hardly a good plan doe the future.

Wed, 12/09/2009 - 14:48 | 158111 Anonymous
Anonymous's picture

Thank you for saying that. Also, I'd note that I$rael never seems to have any financial problems, since they are propped up artificially by Western debtor countries. :-(

Wed, 12/09/2009 - 14:37 | 158089 Anonymous
Anonymous's picture

What crimes?

Wed, 12/09/2009 - 14:59 | 158126 dnarby
dnarby's picture

You're kidding, right?

Wed, 12/09/2009 - 11:34 | 157851 Anonymous
Anonymous's picture

I'm not sure how you went from this--"No. Its not that bad."--to this--"Our popuations are booming from this influx. More significantly, our demographics are improving (younger generations make up the majority influx)." From what I can see, that does not bode well at all.

Following your statements to their logical conclusion, the only way to keep the system going is to increase populations in pension-oriented countries into infinity and continuously ramp up inflation; if you think this is sustainable over the long run you're kidding yourself. Ponzi schemes ALWAYS crash eventually.

Wed, 12/09/2009 - 10:42 | 157767 Winisk
Winisk's picture

Increasing populations isn't a fix once we come to terms that the world population cannot continue to grow indefinitely.  Think about it.  The larger challenge is how we are going to disperse the available resources.  Preserving the lifestyle of the pensioners at the expense of the children is unsavoury, which is essentially what is being proposed in this report.  The elderly have always been dependent on the young for survival but never before have the demographics been so inverted.  Traditional options no longer apply in my view.  

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