The economic and labor shock of the coronavirus crisis is increasing pressure on the pension financing, as the Organization for Economic Cooperation and Development (OECD) warned this Monday, recalling that they were already under stress due to underlying trends such as demographic aging.
“Covid-19 has caused a strong disturbance in labor markets, with cascading effects on retirement savings and pensions,” explains the Organization for Economic Cooperation and Development (OECD) in a report published this Monday and dedicated for the most part to funded systems. This document warns that the health and economic crisis increases the probability that problems such as the imbalance between a growing number of retirees whose pensions must be financed by fewer younger generations entering the labor market will be prolonged and exacerbated.
In addition, due to difficulties in finding a job, to keep it or due to low remuneration in some jobs, many people will be unable to save for their retirement.
The impact of debt
As if that were not enough, the new debt accumulated by the States to face the recession with massive aid for companies or workers (the ERTE) “it will put pressure on the financing of pensions, which are already under tension due to demographic changes”. For its part, the higher mortality generated by the coronavirus “is expected to reduce spending on current and future pensions only slightly.”
In 24 European countries where a joint accounting of the “excess” of mortality due to the epidemic in the first nine months of the year has been made, the increase has been calculated to have been 6%. If this trend continues, by the end of 2020 the number of those over 65 will have reduced there by 0.2% and savings in retirement benefits by a similar percentage.
Given that pensions are on average in OECD countries 8% of its gross domestic product (GDP), that 0.2% would represent 0.016% of GDP. A drop of water when it is known that the public deficit in the countries of the organization, due to the economic rescue plans, is going to skyrocket from 3% of GDP in 2019 to around 11.5% this year, and it will remain very high in 2021 (8.5%) and 2022 (5.9%).
Pablo AntolÃn, head of the team that led the study, explains to Efe that “in pay-as-you-go pensions, the covid is going to have a very strong impact, but that impact is for tomorrow, not for today.” In a system like the Spanish one, in which distribution dominates, for the moment the loss of jobs and wages leads to a reduction in Social Security contributions that the State buffers with an increase in public debt. But it is not known how this issue will be tackled in the medium and long term.
Impact on pensions
In funded systems, the impact of the crisis will be more immediate due to strong fluctuations in financial markets in which retirement savings are largely invested.
For these savings, the first major recommendation in the current context, AntolÃn underlines, is that “losses do not materialize” because it must be taken into account that markets are often characterized precisely by these marked variations.
The proof is that in the first quarter of this year the assets of the pension funds depreciated 10% in the OECD, mainly due to the collapse of the financial markets, and went from representing 49.2 trillion dollars to the end 2019 at 44.3 trillion at the end of March. However, at the end of the third quarter, the recovery had already allowed it to return to pre-crisis levels.
The OECD highlights that the last global financial crisis took two years to regain the level it had in 2007, before it broke out. Another of the great tips is that the possibility of recovering in advance the savings deposited for the pension “should be allowed but in exceptional circumstances” because in this way what is done to face immediate needs is “to jeopardize the retirement of tomorrow. Ana”.
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