High levels of youth unemployment will lead to widespread poverty in old age as young people struggle to save for retirement, according to the Organisation for Economic Co-operation and Development.
A new breed of private pension schemes, which are built on monthly contributions, will be undermined if younger workers stay unemployed for long periods, said the Paris-based thinktank.
As it warned that babies born today will live until 100 years of age on average and retire at 70, the OECD said the weakness of the British state-funded system meant workers in the UK were among the most vulnerable.
Stefano Scarpetta, an employment specialist at the OECD, said: “It is of great concern that many countries are building contributory pension systems when they have large numbers of unemployed young people who cannot contribute and will have very low retirement incomes.”
His comments came as the OECD said that on most measures, the UK ranks in the bottom half of the pensions league table. Public expenditure on pensioner benefits as a proportion of GDP is lower than the average. Pensioner living standards are also below the OECD average. Italy has the highest spending on pensions as a proportion of GDP whereas the Netherlands, which has a large private and workplace pensions top up, has the highest standard of living for retirees.
To tackle long-standing weaknesses in the UK retirement system, the thinktank said the government has one of the most comprehensive pension reform programmes in the developed world.
While other countries have focused on tackling the growing burden of future pension costs by raising the state pension age or improving incentives for older workers to stay in the jobs market, the UK has pursued every avenue to both improve the lives of older people and cut the cost of providing them with a decent income, said the OECD.
The Paris-based organisation said in its report Pensions at a Glance 2013 that the UK had raised the average incomes of people above the retirement age and introduced plans to expand coverage through the workplace pension savings scheme Nest, which is expected to automatically enrol 10 million workers over the next three years.
But it said the knock-on effect of policy reforms, many of which protect the benefits accrued by older workers at the expense of young employees, was that in many OECD member countries younger workers were now more at risk of poverty than retirees.
“Pension reforms made during the past two decades lowered the pension promise for workers who enter the labour market today. Working longer may help to make up part of the reductions, but every year of contribution toward future pensions generally results in lower benefits than before the reforms,” it said.
“The reduction of old-age poverty has been one of the greatest social policy successes in OECD countries. In 2010, the average poverty rate among the elderly was 12.8%, down from 15.1% in 2007, despite the Great Recession. In many OECD countries, the risk of poverty is higher at younger ages.”
The report says many countries have failed to construct adequate protection for low earners. In the UK, the voluntary Nest scheme, which has proved popular with employees in the small number of companies to use it so far, could leave many people without the top-up retirement provision experts believe will be needed to have a decent standard of living in 20 or 30 years time.
The OECD points out that personal pensions based on stock market returns favoured by British politicians have inherent risks and may fail to deliver adequate returns over the longer term. Young people who cannot contribute in their early working life will find their retirement incomes suffer badly.
It said Poland and Hungary had ditched schemes that rely on stock market returns while the UK, the Czech Republic and Israel have expanded them.
In many countries older workers have come to see their homes as a potential source of income in retirement, whether following a sale or through equity release. The OECD said it was not clear how prevalent or effective housing would be to boost incomes and countries needed to “explore in greater detail how housing and financial wealth can contribute to the adequacy of retirement incomes”.
The thinktank also highlighted the benefit of public services to retirees and especially lower income groups. It said governments needed to win public support for public service provision that allows older people to continue working and living a decent life.
“Public support is set to play an increasingly important role in preventing old-age poverty among people requiring health and long-term care services,” it said.
A rise in the retirement age to 67 in the UK means state expenditure is only expected to increase by 0.5% over the next 40 years to 8.2% of GDP, well below the OECD average of 11.7%.
Source: The Guardian – http://www.theguardian.com/business/2013/nov/26/uk-pension-reforms-oecd
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