Citigroup recently released a new report painting a bleak picture of the global pensions system. The report finds that both public and private pensions are faced with a crisis. According its estimates, the total unfunded liabilities of government pensions in twenty OECD countries are $78 trillion, almost double the $44 trillion official national debt. In other words, the total global government debt may be three times as large as what people think it is. Corporate pensions are also in trouble, with an aggregate funded ratio in the US of only 82%.
The report notes the role of changing demographics, combined with optimistic economic and mortality assumptions in creating the crisis. Due to their long duration nature, pension liabilities’ valuations are highly sensitive to those assumptions. Lower than expected interest rates, higher than anticipated inflation, and longer than expected life expectancy all negatively affect the funded status.
Among the report’s recommendations for dealing with the crisis are more transparency in pension debt disclosure, raising the retirement age, utilizing collective defined contribution plans, and making full required contributions.
Read the report here.