United States face retirement tsunami Will it hit Europe and Asia next??

1. Allianz Demographic Pulse
www.allianz.com No 1|2011 (January)
United States face
retirement tsunami
Will it hit Europe and Asia next?
Dwindling state pensions, Around the globe, this “power generation” First with the shift from defined benefit
is facing one of the most pronounced (DB) to defined contribution (DC) saving
rising longevity and increas- retirement income challenges in history. schemes, longevity risk is increasingly
ing personal responsibility The task is threefold. placed onto individuals’ shoulders. Most
for sufficient retirement
savings – baby boomers all In the United States there is a widespread belief that a retirement crisis is at hand
over the world face similar
Image © Anthony Richardson, 2010 / shutterstock.de
100
Somewhat
challenges and the United 90
Absolutely
States is a laboratory for 80
these trends. Whether or 70
60
not they have the retire- 50
ment they hope for is up to 40
baby boomers themselves. 30
20
10
0
Total Late 40s
* Source: Allianz Reclaiming the Future Study/Larson Research
A huge majority of boomers think there is a retirement crisis*
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2. Allianz Demographic Pulse No. 1|2011 (January)
social security systems in Europe used to United States first to face “baby boomer tsunami” – but Europe and Asia follow closely
feature generous Pay-As-You-Go approach-
Percentage of population aged 60–65
es in the public pillar, yet recent reforms 10
reduced this generosity and increased the
importance of non-public pillars. In the 9
Hongkong
United States, the home of DC, less than Germany
Hungary
10 percent of companies still offer DB 8 Italy Spain
China
Austria
plans and in the UK, the number of DB
pension funds open to new members has 7
Switzerland
Belgium
decreased to 27 percent1 in 2009. Hong UK Turkey
Kong has reformed its pension system 6
U.S.A. France Thailand
as well, intending to have a mandatory
DC plan as the main pillar for retirement
5
provisions. 2015 2020 2025 2030 2035 2040 2045 2050
Year of biggest peak
Source: UN World Population Prospects, 2008
Second, individuals experience the
pleasure and the pain of increasing life The rectangles show the year with the highest percentage of the population
in the pensionable age (60–65) in the respective countries
expectancies. When Chancellor Otto von
Bismarck introduced one of the first nation-
wide social security system in Germany As the above graph shows, baby boomer Retirement crisis at hand
in the late 19th century, life expectancy entry into retirement will peak at different One of the most striking findings of the
for men amounted to 45 years while the points in time across the countries. The Reclaiming the Future study was the almost
retirement age was 70 years. Today, men United States acts as a trailblazer and is universal agreement that the United States
can expect to live to age 72.3 in Europe followed by Central European countries is facing a retirement crisis. When asked,
(68.4 in Asia; 77.8 in North America)2 and and Hong Kong. Southern and Eastern “Do you believe there is a retirement crisis
will probably live even longer in the future. European countries as well as Thailand will in this country?” an overwhelming 92 per-
Time spent in retirement and the required succeed a few years later. cent of the respondents answered affirma-
funding will therefore grow unless the tively. Among those in their late 40s, that
retirement age is increased proportionally. When entering into retirement, the number rose to 97 percent.
To mitigate the effects of this development, sheer magnitude of baby boomers will
Germany, the Netherlands and the UK significantly increase the number of While this finding points to a startlingly
raised their retirement age to at least 67 people dependent on contributions from universal concern, the study revealed
years. France increased the earliest retire- the working population and will thereby even greater significance in the personal
ment age from 60 to 62. accentuate the above mentioned issues. ripple effect it had on many respondents.
The realization that there is a crisis has left
The third challenge savers face is invest- Consequently, current US develop- them feeling unsure of their own retire-
ment risk. The shift from DB to DC transfers ments can serve as a crystal ball for ment in two primary areas: preparedness
the responsibility for investment decisions other nations and Reclaiming the Future, and adequacy of savings.
onto the saver and during market down- the study developed by Allianz Life,
turns like the recent financial crisis, DC plan helps understand what we see in it. Respondents’ confidence in their retire-
participants can suffer heavy losses. In the ment preparedness was shaky, at best.
United States, where DC schemes are The study digs deep into the changing Among those aged 44–54, more than half
widely used, savers lost 30 to 40% of their attitudes and examines baby boomers’ (51 percent) said they feel unprepared for
value virtually overnight3 and although preparation for and expectations of retire- retirement. The study’s participants also
some European countries require plan ment in the United States. More than
providers to offer minimum guarantees, 3,200 US adults, aged 44–75, were
exposure to investment risk increased for surveyed to discover the unique needs, 1 Source: Pension Policy Institute
Europeans savers as well. While markets perceptions, and strategies that define this 2 UN World Population Prospects, 2008
are currently recovering, the continued generation’s need to rethink retirement. 3 Investment Company Institute, Enduring
volatility has stirred some deep-seated It also looked into consumer and financial Confidence in the 401(k) System, U.S. Retirement
fears for many people. professional attitudes toward annuities Assets, January 2010
and their role in providing lifetime income.
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3. Allianz Demographic Pulse No. 1|2011 (January)
expressed concerns about their savings. Most Americans fear outliving their retirement income more than death
Overall, 57 percent said they are worried
Image © Pavel Shchegolev, 2010 / shutterstock.de
that their nest egg may not be large
Death Outliving my money
enough in retirement. In fact, 47 percent
are afraid of not being able to cover their
basic living expenses in retirement.
39%
Americans affected deeply
61%
Adding to the fears about savings is
the market uncertainty of the past two
years. The recent downturn affected
many Americans deeply – and they are
continuing to feel those effects today.
Of the people surveyed, 56 percent of
those aged 44–54 agree that the “recent
market events created major questions * Source: Allianz Reclaiming the Future Study/Larson Research
around when, and whether, I can retire.”
Question: Which do you fear most? Death or outliving money in retirement? *
Yet, despite these fears, the global retire-
ment market is expected to grow to
$45 trillion until 2020 – led by the United death?” A surprising 61 percent of the viduals surveyed were allowed to choose
States, where pension assets are expected respondents said they were more scared from a wide selection of variables that
to grow at 3.6 percent compound annual of outliving their assets than they were included high returns, low fees, access to
growth rate to reach 20.9 trillion by 2020. of dying. Among people aged 44–49, that money, and so forth.
Increasingly, these assets will come from number climbed to 77 percent. And a
the 401(k) plans of US workers since the whopping 82 percent of those in their late Reclaiming the future
shift from defined benefit to defined 40s who had dependents were more afraid The most-selected feature was “the ability
contribution plans has led to an indi- of outliving their money than they were to create a stable, predictable standard
vidualization of retirement savings. This of death. of living throughout retirement.” In second
trend toward increased savings and more and third place, respectively, was the
responsibility for those savings indicates The study also explored other areas of “ability to provide a guaranteed income
that Americans are beginning to take con- retirement insecurity, asking respondents to stream for life” and “guaranteed not to
trol of their retirement planning, but data consider which is likelier: getting their full lose value.” When asked to choose be-
from the study suggest that they are still due from Social Security or getting struck tween high returns or guarantees, 69 per-
uncertain about their retirement income by lightning. More than one-third (39%) cent of those surveyed said they’d prefer
and whether or not it will be there when said it’s more likely to be hit by lightning. a product that was “guaranteed not to
they need it. This all points to the reality that retirement lose value,” while only 31 percent chose
planning in the United States needs to a product whose goal was “providing a
Increasing life expectancies mean that change, and boomers need more options high return.”
Americans are spending more years in to help ensure the safety of their retire-
retirement. Unfortunately – as pension ment savings. When planning for retire- An overwhelming 80 percent of the
plans disappear and Social Security ment, Americans must now address three people surveyed preferred a product
benefits dwindle – they’re also funding challenges. First they must look beyond with 4 percent return and a guarantee
more of their own retirement. The defined benefit plans or Social Security for against losing value over a product with
result – Americans are increasingly at their retirement income. Second, they 8 percent return and vulnerability to
risk of outliving their assets. must guard against outliving their assets. market downturns. When asked to choose
And third, they must find a way to protect between putting money into an annuity-
Outliving assets their assets from market downturns. like product (moderate growth oppor-
Consumers are aware of this risk – when tunity, monthly income, guaranteed for
surveyed, an average of 59 percent of With these themes as a backdrop, the life, but limited access to the lump sum)
all age groups reported worrying about Reclaiming the Future study asked con- vs. a similar instrument that provides total
longevity. The study tackled the question sumers to consider the features that would access but risks running out of money,
by asking, “which do you fear the most: be most important to them, if they could 56 percent chose the annuity-like product.
outliving your money in retirement or build the ideal financial product. The indi-
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4. Allianz Demographic Pulse No. 1|2011 (January)
Despite the desire for the benefits these purchase, citing the protection of their income will disappear. They’ll risk out-
products can provide, the study showed nest egg, protection from market down- living their savings. And they’ll be more
that a surprising 54 percent of the respon- turns and guaranteed income for life vulnerable to market downturns.
dents expressed distaste for the word as the key benefits. In fact, consumers
“annuity.” Perhaps this is because more ranked annuities highest in satisfaction There are options
than 50 percent formed their opinion among all financial instruments, beating As the Allianz Reclaiming the Future study
of annuities more than 10 years ago. out mutual funds at 38 percent, stocks has demonstrated, Americans are aware
Another 28 percent of respondents said at 36 percent, US Savings Bonds at of this looming crisis – and they are scared.
they formed their opinion between 10 35 percent and CDs at 25 percent. (Gold Fortunately, there is hope. As the study
and 20 years ago. And of those respon- and precious metals came in first, with also demonstrated, Americans do have
dents, 64 percent admit that they haven’t a satisfaction rating of 62 percent) options as they face these challenges and
researched annuities in the years since. plan for retirement. Further, the study
An unprecedented number of Ameri- also found that annuities may be one of
Distaste for the word annuity cans are preparing to retire, and they the most relevant of these options: Only
At the same time, for those that own will face unprecedented challenges. annuities can offer the combination of
annuities, 76 percent are happy with their Once-reliable sources of retirement principal protection and income for life.
Editor: Katie Libbe, Allianz Life Minneapolis
Publisher: Allianz SE, Königinstrasse 28, 80802 Munich, Germany | Claudia Mohr-Calliet, claudia.mohr-calliet@allianz.com I http://www.allianz.com
Why does Allianz care about demography? Why does it matter to journalists and the public? What are the benefits of Allianz Demographic
As a global financial service provider, Allianz believes Demographic change is challenging today’s societies Pulse?
demographic change to be of crucial importance. in many ways: People are getting older, and this raises Allianz Demographic Pulse is based on the latest
Identified as one of the major megatrends, demo- the issue e.g. of long-term care and dementia. research into various aspects of demographic change.
graphic change will hold the key to many upcoming Furthermore in the future there will be a significant Conducted and written by Allianz experts, it highlights
social challenges, whether with regard to health, old- decline in the workforce in all of the world’s markets, current and globally relevant demographic data and
age provision, education, consumption or capital triggering for example a challenge in pension fund- provides an insight into their impact on worldwide
markets. ing. Only information, awareness and discussion on economies and societies. To ensure up-to-date
the topic will help to change attitudes, behavior and coverage of major developments in this field, Allianz
situations, so hopefully solve urgent needs and come Demographic Pulse is published on a regular basis,
up with innovative solutions. thus providing ongoing and detailed information about
a major trend that is shaping the world we live in.
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