Canada rose two spots to No. 9 among 43 countries in Natixis Investment Managers’ 2018 global retirement index.
The modest rise in Canada’s ranking is attributed to improving economic conditions and environmental factors, according to the report, which also points to several factors — low interest rates, growing levels of public debt, aging populations and human longevity — as indicators for the ongoing sustainability of global retirement systems.
The report notes that the traditional three-pillar system, where an individual’s retirement income consists of personal savings, benefits from an employer plan and government plans, isn’t working smoothly in practice. This is due to rapidly aging populations, rising liabilities in government pension plans and stagnant wage growth.
In addition, while it remains a necessary area for action from stakeholders, including employers and policymakers, changing the three-pillar system as it stands is quite difficult due to its complexity, according to the report. As well, demographics have been shifting over the past 70 or so years, resulting in increases in longevity due to steady advances in health care and living standards. However, the report notes the problem has been less dramatic since about 1982, when growth in public equity markets, even with several major downturns, has been able to provide returns large enough to cushion the growing tide of seniors with the population as a whole.
That said, the financial crisis of 2008 was a different story, the report noted, highlighting the subsequent economic reality of 10 years of extremely low interest rates and the effect on the investment environment. Public spending didn’t slow during or after the crisis, resulting in debt that’s still hampering the ability to allocate properly toward government-run pensions, it said, noting other costs are coming into play, such as insurance risks rising due to climate change, as well as increasing health-care costs.
“With all this movement we see, and all these factors coming to bear, what are the big risks to retirement security around the world?” asks Dave Goodsell, executive director of Natixis Investment Managers’ Center for Investor Insight. “And really at the top of that is we have monetary policy that has been stuck in crisis mode for the better part of a decade. And so the responses folks had to the global financial crisis in 2008 are still impacting how we look at retirement today, and ultra-low interest rates might be great if you’re buying a house or a car, but they really can wreck havoc on retirement. Think about it in terms of if you’re saving for retirement, you’re not able to generate the interest off a principle that you would like.”
In this landscape, there has also been a major increase in public debt around the world, Goodsell emphasizes. “At its most basic level, that means you have fewer dollars to work with as a policymaker and you have to be judicious in how you spend that,” he says. Greece, where public pension cuts led to protests in the streets, is a prime example of a country that’s gone through extreme scenarios due to lack of public funds at the government’s disposal, he notes. “It’s not how do you do more with less, it’s how do you do the same with less?”
Another key factor to watch is the world’s population is simply getting older. “We see old-age dependency as the core to math for the retirement system,” says Goodsell. “You’ve got to have more individuals who are younger paying into the system than you do older people taking money out. If you don’t have that balances out it’s just not going to work.
“And the solutions to that are not popular measures,” he adds. “It’s raised retirement ages, we’ve seen people hit the streets protesting that. It’s reduced benefits. And in some cases, it becomes a conversation around immigration. How do you replace the younger part of the workforce if you don’t have it in your own population growth?” Australia has been exemplary in managing its population by encouraging skilled workers to immigrate, he adds.
As well, other major global occurrences such as climate change can have a surprisingly significant impact on retirement security, says Goodsell. Super storms and wildfires are becoming all the more prevalent around the world and have the potential to wipe out major chunks of a retiree’s built-up equity. “Let’s say you have someone from Toronto who retired to the Florida Keys, and Irma comes through and your house is washed away,” he says. “You’re forced out of your home. You’re forced out of the plan that you built.”
The annual report found Western Europe is dominating the index, with the top positions going to Switzerland (No. 1), Iceland (No.2), Norway (No. 3), Sweden (No. 4), Denmark (No. 8) and the Netherlands (No. 10). While New Zealand (No. 5) and Australia (No. 6) also maintained their positions in the top 10, Ireland entered the ranking for the first time, at No. 7.