Adjusting to new retirement realities

THE SUN IS SETTING on the golden age of retirement. In Europe, where generous retirement benefits have been a bulwark of the postwar social compact, the realities of increased longevity and a bigger population of seniors, combined with slower economic growth, are starting to be reflected in national retirement policy. Two weeks ago, for instance, the French employment minister announced plans to raise the nation's legal age of retirement to 62, from 60, and to increase the number of working years needed to claim a pension to 41.5, from 40. He said other European nations have faced up to the increasing age of their population by working longer and that France must do the same. Throughout Western Europe, the official retirement age is rising. By 2029, Germans will have to work until 67 to claim their government pension, up from the current 65. British men, who now retire at 65, and women, who retire at 60, will have to work until 68 by 2046. Spain is increasing its retirement age from 65 to 67 by 2013; the Dutch will so the same by 2025. Americans, who already work more hours per week than Europeans, on average, and often retire later, probably would view Europe's changes as not much of a hardship. But in our own ways, Americans must also come to grips with the same demographic forces — an aging population, a smaller work force in proportion to the number of retirees, and greater longevity — that are looming for most of the industrialized world. In retirement matters, as in most economic issues, cold, hard reality eventually shapes policy. Worldwide, there simply is no way out of the demographically driven retirement income dilemma other than saving more and working longer. For possible solutions, Americans should consider the efforts of the Canadians and Australians, whose economies and standards of living are perhaps most similar to ours. The Canadian government, for example, may consider allowing banks and insurance companies to offer broad-based defined-contribution pension plans to multiple employers, all employees and the self-employed. The proposal is aimed at cutting costs, and improving retirement savings and pension coverage, and comes on the heels of an economic report by a large Canadian bank warning that a growing number of Canadians won't have retirement income adequate to maintain their standard of living. Australians have come up with a solution to savings adequacy by making a 9% employer contribution to individual-retirement-account-like plans compulsory. The mandated high rate of saving has had the effect of providing Australians with a much thicker asset cushion than that of most Americans. But even that may not be enough. In its most recent household study, the Australian government found that most people expect to retire before 65 and expect the main source of their retirement income to be sources other than a government pension. This finding indicates that most Australians still haven't come to grips with the fact that there is a limit to the retirement income that even a relatively large pool of retirement assets can generate. Americans — like Australians, Canadians and everyone else in the developed world — will be tackling the issue of retirement adequacy over the next decades. Barring a miraculous burst of economic growth, expectations about retirement income, lifestyle and even timing probably will have to be tempered. For financial advisers, managing those retirement expectations may be a more difficult job than managing assets.