Retirees’ pensions protected during Covid-19 but ageing challenges continue, OECD says

Pension finances deteriorated due to lost contributions but state budgets covered shortfalls

The pension payments of retirees fared well because of governments' exceptional policy responses to the Covid-19 crisis. Getty

The pension payments of millions of retirees around the world were well protected during the Covid-19 pandemic but ageing challenges persist, according to the Organisation for Economic Co-operation and Development.

Future pensions were also protected because of governments' “exceptional policy response” to the crisis, the OECD's Pensions at a Glance report said.

“Pension finances deteriorated during the pandemic due to lost contributions; however, shortfalls have been mainly covered by state budgets,” the Paris-based organisation said on Wednesday.

The pandemic tipped the global economy into its worst recession since the 1930s. As countries went into lockdown to contain the virus, unemployment surged with millions of people losing their jobs.

In response, governments last year introduced a number of measures to boost the resilience of pension systems, such as extending job retention programmes and unemployment benefits, to allow workers to continue to accrue retirement benefit entitlements.

However, long-term financial pressure from ageing persists in OECD-member countries and the retirement age will increase on average by two years by the mid‑2060s, the research found.

The combined retirement savings gap is expected to reach $400 trillion by 2050 between eight major economies – Canada, Australia, the Netherlands, Japan, India, China, the UK and the US, according to a 2019 report by the World Economic Forum.

Although life expectancy gains in old age have slowed somewhat since 2010, the pace of ageing is projected to accelerate over the next two decades, according to the OECD report.

The size of the working-age population is projected to fall by more than a quarter by 2060 in most Southern, Central and Eastern European countries, as well as in Japan and Korea, the report said.

“Putting pensions systems on a solid footing for the future will require painful policy decisions: either asking to pay more in contributions, working longer or receiving less pensions. But these decisions will also be painful because pension reforms are among the most contentious, least popular and potentially perilous reforms,” the report said.

The Covid-19 crisis could also cast a long shadow on retirement for future pensioners, according to the OECD.

“Young people have been severely affected by the economic and social impacts of the crisis and might see their future benefits lowered, especially if the pandemic results in longer-term scarring and difficulties in building their careers,” the OECD said.

“Allowing early access to pension savings to compensate for economic hardship, as observed in some countries such as Chile, may also generate long-term problems: unless future higher savings offset these withdrawals, low retirement benefits will be the consequence.”

Mandatory pensions vary widely across OECD countries, the report said. Across the OECD, an average wage worker starting a full career in 2020 is expected to take home 62 per cent of their salary when they reach retirement.

But this ranges from less than 35 per cent in Estonia and Lithuania to more than 90 per cent in Hungary, Portugal and Turkey, the OECD said.

Many countries have introduced automatic adjustment mechanisms (AAM) that update pension system parameters – such as retirement ages, benefits or contribution rates – when demographic, economic or financial indicators change, the report said.

The use of AAMS reduces the need for frequent pension reforms, it said.

About two thirds of OECD countries use some form of AAM in their pension schemes, the organisation said.

“While they can reduce the need for governments to make ad hoc interventions, they cannot isolate pension systems from political decision-making and certainly are not able to put pension systems on autopilot," the OECD said.

"In part, this is good news since governments must retain the flexibility to make changes in exceptional situations and adapt their pension policies to changes in labour market, health and social circumstances.”

While suspending automatic adjustments may be a necessary step to address concerns that such adjustments could generate harsh corrections at the lower end of the income distribution, governments should be sure to have a concrete alternative plan on how to finance pension expenditures in the longer term, the report said.