FESTIVAL OF ECONOMICS

Sovereignty in conflict

June 03, 2012

Reinventing retirement in challenging times

"Retirement does not at all mean to stop making important choices for one’s life.” It seems an obvious conclusion, but, as explained by Olivia S. Mitchell at the Trento Festival of Economics – it is often forgotten, with the pension taken to mean a kind of guaranteed life payment. In contrast, the management of savings after retirement from work is not always properly planned, to the point that in recent years the pension has become synonymous with an economically disadvantageous situation. What are the risks associated with retirement and how can we best protect ourselves in the latter stages of life?

Olivia S. Mitchell- Photo by Daniele Mosna

Olivia S. Mitchell, who is a professor at the Wharton School and professor at the University of Pennsylvania, who has been studying pensions for more than thirty years, has long maintained that retirement does not necessarily mean inactivity. "For our parents”, she maintains, “retiring meant passing your time playing golf” while today it is more common to understand it as the beginning of a new life, as the time to devote time to the community or as an opportunity to start new kinds of work.

However, all this is possible only with sound economic planning, since due to lack of savings the retiree often finds themself in a state of precarious subsistence. The main sources of risk identified by Mitchell are: individual lack of knowledge, the various pension systems, government politicies and the global context. It is therefore necessary to identify and avoid sources of risk, using solutions such as insurance annuities, life insurance and long term medical care. However, there are many critical issues related to these.

According to Mitchell, the risk management of retirement should be a priority for all workers, but asset management does not always prove to be simple for those who do not have adequate knowledge of the relevant financial instruments. Indeed, according to a study conducted in the U.S., financial illiteracy affects about 60% of the population, a figure that increases in proportion to age (in Italy the figure is even worse). As a result, management of savings is often entrusted to approximate tools which do not take account of many factors, calculating for example on the basis of theoretical life expectancy, with many finding themselves in difficulty if they have spent too much before the age of 75. Therefore, those who plan their resources properly save almost three times more than those who ignore the financial instruments, with important consequences on the last stage of their lives. In this context, the effects of the financial crisis have proved even more dramatic, to the point that the underfunding of pensions is now a global problem. Many pension funds were in fact based on the stock or property markets and have suffered devastating effects as a result of the crisis.

From the political point of view there are also other reasons for concern. The current pension system is structured so that younger generations bear the costs of the previous ones, but in the absence of a uniform and constant growth the younger generation increasingly see their margins eroded. Costs of pensions are therefore exploding due to demographic reasons: longer life expectancy and the increasing number of over sixties who are preparing for retirement has brought the system to a level of total unsustainability. What can be done to better manage pension risk? “First”, Mitchell concludes, “by investing in their financial knowledge, to save more and invest more wisely, diversifying investments and choosing the best form of insurance."But at the same time, given the substantial improvement of living conditions with respect to past generations, carrying on working seems an increasingly likely possibility, perhaps along more personal objectives, as indeed was the case not more than one century ago.

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