The retirement problem – solutions from financial leaders

It’s not just the baby boomers. Countries around the world are bracing for a retirement wave and the costs that come with it.

A Sept. 18 panel of experts at the MIT Center for Finance and Policy’s second annual conference surveyed challenges, solutions, and financial products for retirement in the United States, Canada, and South Korea.

United States: The health care conundrum

MIT Sloan Senior Lecturer Robert Pozen discussed the burdens on local governments in the United States from “other post-employment benefits” for health care—a challenge he said was unappreciated by many ordinary citizens.

“This is an elephant in the room,” Pozen, the former executive chairman of MFS Investment Management, warned. “Many jurisdictions allow people to retire at 50 and promise retirees free health care until Medicare or for the rest of their lives. Some allow benefits after ten years of part-time service. It’s an expensive promise.” For instance, the town of Newton, Mass. spent $21 million on retiree health care in 2014.

Pozen discussed remedies such as increasing future deductibles or copayments, reducing the scope of health care, or reducing health care promises to new or recent municipal employees.

“The public debate should focus on how [post-employment benefits] can be reasonably revised and properly funded,” he said.

Canada: Targeting the middle class

The Canadian retirement system ranks among the world’s best, thanks to its proactive approach. Thomas Reid, a senior vice president at Sun Life Financial of Canada, noted that poverty is just 7.2 percent among Canadians 65 and older.

Reid spoke primarily about pooled registered pension plans, an innovation that provides improved access to retirement savings plans to workers employed by small and medium-sized businesses. Licensed providers, not employers, manage the plans; employees can automatically enroll and use a target date fund as a default.

“The [plans] target pockets of under-savers. Middle-income Canadians who don’t have access to a workplace plan are most in danger,” he said.

Meanwhile, Ontario will create its own target benefit plan as of 2017, which aims to replace 15 percent of income after 40 years. All workers must participate in this government-administered plan in the absence of an alternative.

South Korea: A shifting demographic

Sunghwan Shin, SM ’88, PhD ’93, president of the Korea Institute of Finance, offered an overview of Korea’s National Pension Service, which was instituted in 1988 as a mandatory, partially funded program. Korea’s aging population and low interest rate make it difficult to sustain. The system is young: Until 2035, there will be more people who pay into the system than those who get benefits. When this balance tilts, however, costs will exceed revenues.

Shin discussed options including increasing the contribution rate, cutting benefits, increasing investment risk, or tax rate increases. He proposed more investment in housing and pondered investing more heavily in other countries, both of which carry drawbacks.

The panel touched on just some of the myriad retirement challenges facing governments at all levels and around the world, said MIT Sloan Professor Deborah Lucas, the director of the MIT Center for Finance and Policy.

“Finding effective solutions will require new and creative approaches that rely on coordinated efforts by the public and private sectors and that build on the sorts of research findings that were showcased at the conference,” she said.