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US feels the cost of ageing

Schroders head of global and international equity Virginie Maisonneuve on the heavy burden that will be felt in the US as baby boomers retire

Virginie Maisonneuve
Virginie Maisonneuve

Like the rest of the developed world, the US is ageing. By 2050, the median US citizen will be five years older than today and the proportion of the population over 65 will rise from 13 per cent to 21.6 per cent.

As such, the labour force growth in the US is slowing, from 1.1 per cent a year in the early 2000s to 0.8 per cent this decade and even slower thereafter. This is primarily due to lower population growth and the gradual retirement of 78 million baby boomers – more than the entire current population of the UK.

Today, the boomers and their children range from 46-64 years of age but next year the first 3.4 million will become eligible for retirement and by 2020 they will all be over 55. This tran-sition will cause the ranks of older workers to swell while younger cohorts are stagnant or shrinking.

Consequently, over-55s in the US will account for 24 per cent of the workforce by 2018, almost double the proportion in the 1990s.

The combination of lower participation and boomer retirements means that, in just a few years, there will be more non-workers than workers in the US economy.

But spiraling healthcare and insurance costs, the shift from defined-benefit to defined-contribution pension plans and inadequate private savings mean that many workers can simply no longer afford to retire when they would like.

At first glance, the US pension system seems in relatively good shape, given that it holds the biggest public pension reserve fund in the world, at $2.5trn (£1.59trn) or 18 per cent of US GDP.

However, despite not making losses during the recession, plummeting tax revenue did mean that assets had to be drawn down in 2009, the first time since the fund was foun-ded. Even if the economy recovers, public pensions will face a permanent shortfall as early as 2016 and the trust fund will be completely exhausted by 2039.

The outlook for public pensions is particularly bleak but other sources of retirement income do not look much better.

Recent research finds that DB pension plans covering public workers are underfunded by more than $1trn, or 30 per cent. Even those funds that do appear solvent are often basing their calculations on outdated mortality tables, high discount rates and unrealistic rates of return.

In the private sector, DB plans still contain around 45 per cent of pension assets and at the end of 2009 the average pension deficit of US-listed companies was 20 per cent. This was already among the worst in the world but preliminary estimates are that funding could deteriorate further to a deficit of 32 per cent or $651bn by the end of 2010.

Ultimately, US workers will have to take greater individual responsibility for their retirement income, likely leading to a further extension of working lives. Company plans are continuing to shift from DB to DC, including 401k plans, and public pension benefits are likely to become less generous. This is recognised by workers, only7 per cent of whom are very confident that the US government will continue to provide benefits at current levels.

All US workers, and particularly those without access to an employer-sponsored scheme, are being encouraged to save money in an individual retirement account, and incentivised by tax relief and mandatory employer contributions.

Maisonneuve: ’The combination of lower participation and boomer retirements means that, in just a few years, there will be more non-workers than workers in US economy’

However, there is a worry-ing amount of evidence to suggest that US workers are not willing or able to take on this responsibility.

According to the Employee Benefit Research Institute, only 60 per cent are currently putting anything aside for retirement and almost 30 per cent had virtually no savings.

Before the crisis, it was estimated that 70 per cent of US baby boomers had not accumulated enough assets to maintain their pre-retirement lifestyles. Since then, households with a head aged 45-64 have seen their net worth fall by more than 45 per cent.

In light of this, we expect to see an increase in old-age poverty and inequality throughout the US. Much is made of income inequality in the US -with the top 1 per cent of earners raking in over 23 per cent of income – but financial wealth including pension assets is even more skewed.

Before the crisis, the top percentile held 43 per cent of financial wealth and the top quintile 93 per cent and this appears to have worsened as a result of the crisis.

Inequality will be aggravated as an increasing prop-ortion of the US population moves into retirement. Around one-third of current retirees are completely reliant on the government and almost the same share again relies on it for the majority of their income.

The US does have the most favourable demographic profile of any country in the developed world. Higher fer-tility and a relatively relaxed attitude to immigration imply that the prospects for sustained economic growth and consumption are better than in Europe, Japan and, in the long run, even China.

But the ageing population poses significant problems for some companies and industries and as America’s baby boomers retire, the changes in the US labour force and the cost of ageing will weigh heavily on both government and corporate balance sheets.

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