The U.S. pension system is expected to become more difficult to keep adequately funded as the “working-age” population is expected to decline by 2020, according to a report from Mercer.
The U.S. working-age population, defined in the report as ages 15-64, is expected to decrease to 64% by 2020, from 66% this year. It was at 67% in 2007.
“It's the proverbial pig going through the python,” said Arthur Noonan, senior partner in Mercer's retirement business, about more money being paid out than going into pension funds.
Mr. Noonan said plans are getting more expensive for a number of reasons, including an aging workforce, an increase in retirees, more people retiring early and longer life expectancy.
The only ways for corporate plans to respond is through financial management of the pension fund and strategic management of the workforce. Pension funds need to have a step-by-step derisking strategy, something that was lacking in the 1990s when pension funds were overfunded, Mr. Noonan said in a telephone interview. Lump-sum offers can also help companies as they will reduce the size of their pension plans.
“Interest rates could be higher in 2020, they might not, but what is the step-by-step plan?” Mr. Noonan said.
In workforce management, companies have to adequately convey how they value long-tenured employees because plan participants retiring early or working too long could make the plan more expensive.
For public pension funds, Mr. Noonan said about reforms, “My sense is (legislators) are not willing to take it on in full at this point. Unless you do something dramatic, you're not going to close that gap.”
The U.S. along with China, the U.K. and most of Europe, is expected to see a two-percentage-point decline in the working-age population by 2020. Canada, Japan and Russia are projected to have a four-percentage-point decline and Hong Kong will drop six percentage points.
Brazil, India, Indonesia, Malaysia and Mexico are expected to see a two-percentage-point bump in 2020, while Pakistan is projected for a three-percentage-point increase.