Populations and pensions

Regional demographic trends are the single most important factor to pension reform around the globe, according to a research paper by analysts at Munich-based Allianz Global Investors AG.

“Pension reform in different parts of the world faces distinctly different challenges, with demography being a primary driver,” the Allianz experts wrote in “Retirement at Risk: The U.S. Pension System in Transition.”

The asset management firm’s parent, Allianz SE, is a management holding company for a group of money managers that include Pacific Investment Management Co. LLC, Oppenheimer Capital LLC, NFJ Investment Group LP and Nicholas-Applegate Capital Management LLC.

Allianz analysts identified three different groups worldwide: emerging and developing countries either setting up pension systems or with systems created only recently; industrialized Western countries with mature pension systems; and other industrialized economies that are comparatively better funded.

Australia, Canada and the U.S. are part of the third group, which is the best situated, the report said. “Not only do their pension systems feature strong, funded pension pillars, but as traditional immigration countries, they will be less affected by the coming demographic challenges. Positive net immigration to the U.S. will keep the population growing, if at a decreasing rate,” which will help ensure that young workers keep on funding pension systems.

The report is less optimistic about the pension outlook for the second group, which mostly include older Western economies with less supportive demographics and less well-funded pension systems. “The old-age dependency ratio, which is driven by decreasing fertility and increasing life expectancy, will worsen significantly over the next decades,” in those countries it said.

The U.S. has a more favorable ratio of older to younger workers. Nevertheless, that ratio is on an upward trend that shows a deterioration of pension funding as baby boomers prepare to retire, the report noted.

The old-age dependency ratio in the U.S. now is 18 people older than age 65 for every 100 working-age adults. That will climb to 34 by 2050, “which is less than half of what other industrialized countries are expected to face,” the report said. In Japan, for example, the old-age dependency ratio is projected to be 74 by 2050, while in Western Europe it is forecast at 52.

Based on United Nations data, the Allianz report projected that the potential U.S. work force will peak in 2010 and decline thereafter, and the U.S. old-age dependency ratio is expected to outnumber child dependency for the first time ever in 2030. As the U.S. population grows to an estimated 402 million in 2050 from 300 million now, the median age for the population will rise to 41.1 from 36.

Australia, Sweden and the United Kingdom have the best pension outlook, while the U.S. ranks No. 4. At the other end of the scale are Italy, Japan and China, according to the pension reform pressure gauge developed by Allianz Dresdner Economic Research.

“Australia is under the least pressure to reform its pension system, as the system is comprehensive in nature and based on a strong funded and mandatory occupational pension pillar, the superannuation scheme. China, on the other hand, is in the most need of reform as the overall pension coverage is still poor, and Japan has one of the fastest aging populations in the world,” analysts wrote to underscore the disparity among the pension systems.