Question

How American pension crisis affect citizens?

what challenges come up in your mind to face a crisis on the American Pension plan?

Answer 1

The most important determinant in the degree of impact of the crisis on pensions is the age of the INDIVIDUAL CITIZENS.

• On Younger and prime age workers

Most younger workers are little affected by the financial crisis because their accumulations of retirement savings are small. In the United States, for example, 25–34 year-old people’ balances in their private pension plans increased by nearly 5 per cent on average in 2008, according to the Employee Benefit Research Institute. This is because their new contributions outweighed investment losses. Although they may suffer from the effects of the economic crisis on the labour market, they have 30 years or more in which to recoup losses and offset gaps in contributions.

Similar arguments apply to prime-age workers, though the effect on their private retirement savings (in pensions and other assets) is greater. In the United States, account balances for 35–44-year-old people (with the same 5–9 years’ tenure in the plan as the 25–34-year-old people) fell by nearly 15 per cent. The decline for 45–54-year-old people was nearly 18 per cent. Nevertheless, prime age workers still have time for asset values to recover. Also, their jobs tend to be safer in downturns than those of younger or older workers.

• On Workers nearing retirement

Older workers – those close to retirement – are the group most acutely affected by the economic and financial crisis. They are often among the first to lose their jobs during a downturn and among the most vulnerable to long-term unemployment. Unemployment or early retirement can permanently reduce their old age incomes due to an incomplete contribution history. People in this age group do not have much time to wait for markets to recover and losses to be recouped. Even postponing retirement may only allow them to offset part of their losses.

As with retirees, the impact of the financial crisis on retirement incomes depends on how assets were invested. Some older workers moved their investments towards less risky assets as retirement approached. But most did not. In the United States, for example, nearly 45 per cent of 55–65-year-old people held more than 70 per cent of their private pension assets in equities, according to the Employee Benefit Research Institute. This is only a little below the 50 per cent with such a portfolio under the age of 55 years.

• On Pensioners

Those already retired will, in general, be unaffected by the crisis. The impact of the economic crisis on labour markets is of no direct significance to them. Most are also protected against the losses affecting private pensions even where these are a significant source of retirement income because occupational plans and annuity providers hold assets to back promises to pay a certain pension.

Main Challenges to face a crisis on the American Pension plan

• Low interest rate environment – increasingly difficult to meet benefit commitments
• Negative interest – still essential from a monetary policy perspective

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