Reinventing retirement in challenging times
Reinventing retirement in challenging times
Workers now nearing retirement face greater risks than any previous generations. We outline the three phases of retirement – accumulation, investment, and decumulation – and identify ways to better mitigate and manage the risks in each phase. Topics include financial literacy, a pension overview, and decumulation products.
got super yes good evening ladies and gentlemen thank you very much for attending this meeting it's Saturday afternoon it's we have a beautiful weather let me introduce the professor Olivia Mitchell who has dealt with pensions problems throughout her life she ditches the Wharton School a part of the University of Pennsylvania and she also the director of a Research Institute dealing with pension issues and she has been the member of many governmental commissions in the US and she has been very much looked for consultant she wrote many articles and books and very interesting subjects for example three reasons why your boss should keep you at the workplace after the age of 60 or how boomers can act now to repair the nest egg so what's a nest egg well the nest egg is the real treasure the money you put aside for the time of retirement it's an idea which is unknown in Europe in Europe the central government's guaranteed pensions and protections against the arrests of losing pensions a part of the and early people so when there is no stake there there are problems because on the one hand we need a plan to build a pension for the future we need to be aware how to invest how to plan our lives and when the pension is accrued and the person retired but still our problems because there are still many risks and many decisions to be taken and she is going to speak about that thank you you have the floor good afternoon ladies and gentlemen it's a very great pleasure to be with you today in Italy and in Trento and I thank very much the organizers of this conference as well as particularly Tito beretti for including me in the activities here it's been a rare opportunity to learn about the matters that concern Italy and the matters that concern us around the world so one thing I would say before I start is I began working on pensions and retirement topics 30 years ago I was 30 years younger and it seemed like such a long way away now like many people in this room it begins to grow closer not too close but closer and it has a way of focusing the attention very very different than when you're in your 20s but my topic today is reinventing retirement in challenging times and therefore questions that I will be looking at first of all what are the key elements of retirement risk second how can individuals and their families do a better job to manage this risk then going up the ladder how can firms and financial institutions perform better to help manage the risk and then how can governmental and international organizations again serve for this purpose now I my background is in risk management and insurance and economics and in especially the risk management area you always look at three approaches to protect against risk the first has always identify the sources of the risk second avoid if you can or reduce the risk and third finance and insure where you possibly can so I will talk about these three approaches in the context of the four sources of old age risk first individual and family second pension systems third political or national risk and fourth global risk so let me start with a definition of what is retirement now in the old days perhaps your parents idea your grandparents idea you would stop work at some point you would claim your pension benefit a government plan benefit and at least in the u.s. many people men usually want to play golf in retirement how many people play golf here in Italy not too many okay maybe you go fishing that's the other approach that's the old view of retirement what's the modern view of retirement keep working in many cases some people think about changing career they take advantage of a new possibility maybe of starting a company changing jobs working part-time working as a volunteer it's an opportunity to do something different in the later phase of your work life now of course my plan is never retire and never get old so that seems like another useful thing to think about focusing first on individual retirement risk management we can you're out what the risks are you first identify the risks under saving is a huge problem all around the world people tend to rely on others to take care of them and they don't save enough on their own they also face very expensive health shots and then they live too long that is they outlive their assets and so those are some of the risks that face the individual and the family two approaches mitigation and financing first of all in the mitigation area is a theme I have heard in many sessions at this economic festival the issue of investing in human capital in your own skills so that when you are 60 or 65 or 70 years old someone wants to hire you because you have valuable skills and you can keep working I know that's a little radical in Italy but it's going to come everywhere I would also say even though I'm an economist it's important to think of the social context for growing older if you have a partner that you can rely on if you have good children that can help you when you're old if you have a community a neighborhood where maybe you help them when when it snows you help them shovel the snow and they help you when you're gone take care of the dog this kind of partnership is very important to be able to let people age in place stay in their communities which by the way is much less expensive than putting people in a nursing home in a hospital in some other place and of course we also have to think about risk financing it's a common phrase to talk about self insuring in the West basically what that means is you save for your own old age and invest another approach which I'll discuss briefly is that of ensuring that is you might want to think about to seeing an insurance product which will help protect you against some of those risks so for example annuities are products which help you avoid running out of money when you're old another product is long-term care which I've written up here as LTC long-term care which would speak to the insurance that you might purchase in case you need to be in a community say a medical community to take care of you if you have dementia so those are some ways to finance the risk at your own level now of course the life cycle model many of you have seen this this is very simplified it would suggest that when you're young you're born B you start to earn hopefully at a rising rate and the traditional model would say that at some point like are you take full retirement this is a very schematic view but it's just to illustrate it along the way ideally you would start saving in a pension you would start putting aside assets maybe in your house for example or in the bank account or in the stock market you would build up your savings from B to R and then you would start drawing down your savings from R to D what is D that's the date you die and if you know everything if you have perfect foresight it's easy right you save you dis save and you finish with zero euros in your pocket or if you're more crafty you finish in debt but that is something that economists think of but the point is that you have an orderly asset accumulation and orderly assets spend down that's the theory what do people do many people don't save at all we know there are very big differences across country I hear Italy is among the better savers but in the u.s. we've been saving less and less over time it's very important as we think about the new world we're entering too understand that choices are becoming more individualized that choices are spreading to pensions to financial markets to labor markets and they this has many advantages for example people can act on private information if I know what kind of school I want for my children if I have choice in schooling I can take them to a school that will provide them that education choice is good in many cases it creates incentives for efficiency professor Hanna Scheck yesterday if you heard him spoke about educational competition where it's possible for schools to compete and thereby improve the quality of education they give we also have now in some places voucher systems for medical care you can select your doctor instead of being told to go just to one doctor a little competition doesn't necessarily hurt and in the case of Social Security there has been a some group of people myself included suggesting that private accounts might be a useful addition to the picture for old-age savings those are some positives but there are also some negatives one of the issues we worry a great deal about is what we call sub optimal choice if you give people too much choice and if they don't understand the decisions they're making they may make very damaging decisions along the way and this is particularly true when you have a lot of risk a lot of uncertainty when the time horizons are very long like in the retirement case and people typically follow the path of least resistance they do what everybody else does or they do what seems easy because they maybe don't know the opportunities or they're afraid or they're not educated so one of the threads of my research asks how well-equipped are consumers to make these decisions and here I would like to mention some work that I have done with my colleague Anna Maria lucidity who's also here in the audience and we have now offered these questions on surveys around the world including Italy and so I give you a small test no grade is required so this is a question we've asked in several several countries and it's about interest rates and this is how we posed it let's say you have 200 euros in a saving account paying 10% interest a year how much we do have in the account at the end of two years now we don't expect people to take out a calculator well it's simply we're asking is do you have less than 220 equal to 20 or more than 220 if what's the right answer please volunteer more than 220 if you understand compounding interest you understand you're getting interest on interest very important question if you have a credit card you're paying interest on interest if you have a mortgage to buy a home or to buy a car or a student loan interest on interest it builds up if you don't understand this you're going to make big financial mistakes second question inflation imagine the interest rate on your savings account was 1% a year and inflation was 2% per year at the end of a year with this money in your bank account could you buy more than today equal today or less than today what's the answer less than today right so if you don't understand inflation then you're probably not going to do the right things about saving consumption investment so you guys are really good I'm going to ask you a difficult question this is risk diversification this is the hardest one I'm warning you so true or false by a single company stock usually provides a safer return than a stock mutual fund true or false false your very good today very good you all get A's this is a very difficult question as I'll show you in this next picture this is from a survey which Anna Maria has participated in in 2009 and these three questions were asked of people of all ages the interest rate question less than two-thirds got it right in the u.s. 21% got it wrong and these guys don't know these guys refuse to answer okay so that's not so great next we asked about inflation similar fraction gets it right similar fraction gets it wrong but by far not everybody knows and most worrisome is the third question risk diversification only half the people roughly got it right and so 1/3 had no clue right so if you're talking to people about saving for retirement diversifying your portfolio if they don't understand risk how can they possibly function and if you ask how many people got all three questions right only 30% did half less than half got the first two right so this established the benchmark that we started with that we proceeded to ask these same questions around the world and so you see the very educated people and I will congratulate my moderator here because he's originally from Germany the Germans and the Dutch know a lot the dark blue bar is the percent who got all the questions correct and the black and white bar is the percent who got zero correct so the Germans and the Dutch are doing something right I'm sorry for professor handshake I don't have Finland I don't know and we see that the US Italy Sweden Japan and new Zeeland they're kind of in the middle not so great in terms of the right answers Italy unfortunately has a lot of people who get it wrong who get all of them wrong so you hear you see a big need for financial education starting right away and then Russia poor Russia is in the worst situation then that's probably for historical reasons lack of exposure to financial markets some good news since I'm a professor as you go for people who have very little education these are high school dropouts - people with a lot of Education College or more the financial literacy does go up and this is the question on compound interest unfortunately financial literacy Falls with age so the young people know more the older people know less probably this is in part because of what we call a cohort effect people who are young today were much more exposed to financial issues whereas people today who are in their 70s perhaps were not differences by sex blue is for boys pink is for girls like everywhere of course and not surprisingly across the questions men typically know more they're more likely to answer the questions correctly than women what's also interesting however is that the women know when they don't know in other words they will say if they don't know the answer they tell you I don't know the men tell you they know even when they're wrong so this is an important difference where we start to focus on who we can educate maybe the women we have more potential than the men so the good news is that people who are more financially literate save more plan more accumulate more assets this is in a US study but we've been doing studies again around the world people who are non planners who are not finding actually literate have about one-third the assets of people who are financially literate and again there's always questions about causality are the people smart because they have money or do they have money because they know we believe we've established causality quite reasonably by now it's not enough to accumulate assets unfortunately we also have to make sure we don't run out of money in old age so here we have what we call life expectancy numbers for a man aged 65 he on average using the life tables would expect to live sixteen point four years more women on average at age 65 nineteen point six years that's a life table and frequently when people are thinking about planning for retirement they use these two numbers to target their money okay do I have enough money to last sixteen point four years if I'm a man but the problem is that is very inaccurate life expectancy is an average 50% of the people live longer so if you do live in the if you live longer if you survive to the right tail of the mortality table maybe you still need to consume so what we show here is that 36 percent of the men will live to be at least 85 almost 20 percent will live to be 90 and of course we know survival tables for women are even higher thirty percent of the women will live to be 90 and probably most of the women in this room will live to be a hundred why because you're well educated you probably have better health than average so keep investing in your skills and your health don't give up the other thing to think about is if you have a traditional couple a man and a woman let's say the man let's say is 65 the woman is age 60 just to pick an exam well if you look back in 1975 and ask what's the probability that at least one member of the couple would live to be age 90 it used to be about one-third going forward it's about two-thirds so this is really important because it suggests that longevity risk living a very long time is in a key part of retirement risk management now the only equation I have apologies for those that are allergic to equations so what we need to understand is what financial products can protect us against longevity risk and so annuities payout annuities not investment annuities but pal annuities are a key piece of this discussion so the present value of an annuity is equal to how much the benefit is every month or every year multiplied by the probability you're alive because you only get an annuity payment when you live you discount this cash flow to figure out what is the expected value today of this benefit stream into the future now annuities pay benefits until death obviously you need mortality tables and discount rates to figure out what's the value of the annuity and mortality has changed over time another key factor is that we have what we call adverse selection people who buy annuities are different than everybody else people who buy annuities that is payments that last the rest of their life live longer and you can see that in this figure this is the population distribution of the age at death given that you made it to age 65 and this is the annuitant distribution of the age at death conditional on survival to 65 so this says annuitants live longer now maybe it's because they have an annuity but I think the more reasonable explanation is they buy an annuity because they know they're going to live a long time they eat yogurt they sleep eight hours a night they don't smoke whatever one glass of red wine a day it keeps you going so the question is how important is this and what we've computed for several different countries around the world is what we call a money's worth ratio what's the ratio of the benefit that you can expect to the premium that you pay if the ratio is one it says you pay one euro in expectation you get back a euro now you wouldn't expect an insurance company to give you a dollar for a dollar or a euro for a euro they have to pay their agents they have some solvency premium the capital they have to set aside but these numbers especially the numbers using the annuitant tables are pretty good it says you pay a dollar euro or a dollar in the US and you expect to receive back 93 cents on the dollar if you use the annuitant survival table in Italy it's even better you pay a euro you're expecting to get back 96 cents on the euro so this says these are pretty good insurance products good value for money if you were to compare them with other insurance products you buy frequently like medical insurance what do you think is the money's worth ratio for medical insurance you pay a euro how much do you think you get back in expectation in a year anybody know that in Italy so it's it's public you'd have no private insurance in Italy so in Germany they have private insurance in the u.s. they have private insurance and typically it's maybe 60 cents on the dollar or on the year so this is a pretty attractive product right so in Italy you do have some private insurance right yeah so I believe that the go ahead excuse me we're getting to some applications of to the conclusions if I invite you if you want to you can now also ask the hostess one of the hostesses and they will give you a piece of paper and you send me a question also on a piece of paper and otherwise you just put a question afterwards as you like so if you want to send some questions just think about your questions right from now on thank you Thanks so I believe that in Europe as well as in the US as government tensions grow smaller there will be an opportunity and a demand for more private annuity markets to grow fewer traditional company pensions retirees now have to manage their money and even in some cases for example in Germany with a restore plan there is a mandate that part of your retirement saving be annuitized you must convert some of your assets into a lifetime payment to protect yourself against yourself so you don't run out of money when you're old okay but there is a lot of uncertainty still about how these markets will develop another thing we see all around the world is that if you look at where older people have their assets usually they try to buy a house and this is true in almost every developed country and many developing countries as well the concern is that older people have all their money in one house not diversified and it's not a good time to sell your house at least in many countries so there is a growing demand for a new product relatively new called reverse mortgage where the older person can remain in her house sell a piece of it to a lender get some money back and then when she dies or she has to move out of the house the house goes to the lender so I think this is a potential product with a great deal of interest around the world now there is some concern that the lender needs liquidity the value of the home is somewhat uncertain especially now the person needs to keep up the house to repair it to fix the roof there's mortality risk there's interest rate risk but it is I think a product which will continue to grow the big problem of course is that even though many older people have their money in a house housing is not a safe asset as we see from this graph this is a time picture of the decline in housing prices in the u.s. I think in Trento they didn't go down so much from what I can tell but housing is certainly not a safe asset so I talked a lot about individual and family risk let's go up to pension system risk and finish the ladder so all around the world in many countries where I work I see that public and private pensions are facing huge challenges what can we do in some cases there is pension and insurance regulation to try to protect those promises so there will be money in some cases there's pension financing that is capitalisation assets set aside to protect the promises so the money can be there and some countries like the US and the UK have established solvency funds to back the pensions in the event of bankruptcy pensions however are very troubled this goes back to the beginning of 2008 and you see from the smallest to the largest that was registered how much assets the pension funds had in them invested in capital markets so I know in Italy use the word differently Trillian is the the unit that we're looking at which is a million million so we had 15 trillion dollars worth in the pension funds in assets but unfortunately they were majority invested in the stock market and many other countries also had a tremendous amount invested in the stock market UK Australia Germany being more conservative fared better you won't be surprised to see so now when this the capital crisis occurred you see on the vertical axis the percentage of the portfolio in equities in stock and on the horizontal axis the real return and it's negative in 2008 so we see poor little Ireland very very high fraction and equities very very negative performance us not far off so this is something that has served as a big challenge for the pension system that was designed to protect our retirement what's happening now bankruptcy or near bankruptcy retirement assets have lost value interest rates are very low liabilities are exploding and the companies the sponsors of the pension plans are either insolvent or close to insolvent so this is causing a huge problem across the board earlier our moderator made reference to the nest egg the nest egg concept in the u.s. is where do you have your money that you're saving for retirement some people think the right alternative is defined contribution plans investment accounts which you can move with you when you change jobs and in the u.s. these are called 401k plans after the line in the tax code which permits them to exist they're very popular the employer decides how much salary you can set aside and maybe the employer matches your contribution you put five percent they put in five percent to make you to provide an incentive to invest however up until recently the employee has had the opportunity to decide how much to save and maybe zero it was an option so the challenge is the employer designs the plan and offers the plan what if no one accepts and invests in it typically in these plans the employer designs the investment portfolio the investment menu and it's up to the worker to select the investment allocation now remember back to the financial illiteracy numbers I mentioned a moment ago if I give you 17 funds and you don't know what risk diversification means what do you do and this is a big issue now by definition defined contribution plans are not guaranteed that is you invest in the market if the market drops so does your nest egg shrink now if everyone was rational which I'm sure everyone in this room is you would always balance return and risk you would make independent judgments you wouldn't listen to what your next-door neighbor says you would always diversify your portfolio hold at least 30 different stocks if not a mutual fund and you would pay very close attention to fees this is the rational investor what do people really do it's very different behavioral economics is now showing us that there's a tremendous amount of inertia typically people will pick one portfolio allocation when they're hired and never change it for 40 years they forget about it they also have too much choice so they say ok someone told me diversify and I picked the top 3 on the list and give up after that but if the list was ultra risky fund very risky fund extremely risky fun then you really haven't accomplished anything they follow the herd they do what everybody else does and in the US it's possible for people to put a hundred percent of their pension account in one company stock their own company extremely bad idea but it's still possible and they ignore the fees so what do we do initially very few people a third of the people were investing in these accounts so instead the new model is automatic enrollment everybody is included in the plan unless they opt out and we find that 90 percent participate and no one drops out they know they should do it it's just too hard and too complicated to figure out how to do it but still many people leave their assets in cash forever at the moment maybe it's not so bad given the way the stock market is performing but still they don't pay much attention to it and this is a model which has been adopted in many countries the notion of target maturity dates so if you're a young person you say okay I think I'm going to retire around the year 2050 so right now I join a 2050 fund it's heavy in equity and very little fixed income and as I get close to my target maturity date the fund manager reallocates and rebalances the portfolio for me automatically so that as I get close to retirement age then it becomes less risky and more conservative so I don't lose the money right before I retire so this is a very popular model in Chile and Sweden in very very numerous countries a question I hear very often in the defined contribution model is what about guarantees on investments people think wrongly that guarantees are free now one choice might be what we call a principle guarantee that is if you put your money the fund can you get back at least what you invested that's a principle guarantee that is not the norm in many pension plans now you put your money in and you get whatever you get in Japan however they do have a requirement that a principle guarantee be one of the investments offered you don't have to choose it but it has to be offered in some countries they have a minimum return guarantee or a minimum benefit guarantee even which is interesting because but these are defined contribution plans not defined benefit plans but we have to beware because guarantees are not free in fact they can be very very expensive so with one of my students I looked at the cost of providing a principal guarantee just you get your money back what you invested and this was a portfolio that's half stocks half bonds you hold it for 40 years you invest for 40 years and that's basically free so it doesn't cost much to provide over 40 years a principal guarantee what's expensive is a bond guarantee so if you want to guarantee that your investors get back a bond return over 40 years and you let them invest 50 percent in stock it will cost about 16 to 20 percent of each contribution every year to provide that guarantee so this tells you that guarantees are not a small thing the next level I wanted to talk about was political national retirement risk management a little bit in less detail here we have the risk of market shocks inflation and most importantly for retirement is what I call political risk how do you know today what the tax rate will be tomorrow how do you know today what the health care costs will be you don't and that political uncertainty is also driving a big part of retirement risk what do we do ideally we have good governments with steady fiscal and monetary policy and another option of course is risk financing where we spread risks of political uncertainty over time that unfortunately are fortunately is what we see now with government deficits now this leads me to a discussion of a national old-age Social Security retirement scheme almost every country has one every country tries to balance two aspects - tensions the insurance aspect where you get back more if you pay in more that's insurance versus the redistributive or the solidarity aspect where poor people get back more because they need it more and those two tensions persist in every retirement system at all points in time sometimes one dominates sometimes the other dominates now in a pay-as-you-go scheme such as we have in Social Security in most of our countries it works as long as you have economic growth and growth in the workforce so let's imagine we start out with generations zero generation zero who was around when the system began paid no tax but they got a benefit which was provided by current workers so current workers get a benefit provided by or sorry current retirees get a benefit provided by the next generation the next generation is happy to make that transfer why because they will get more in the future from the generation after that so this kind of intergenerational pay-as-you-go financing works very well as long as you have growth rising workforce rising productivity everybody's happy right but now we're in a different world the tax base has stopped growing in many countries in fact with low fertility rate maybe even it's shrinking so Japan has the most rapidly ageing population in the world and the economy has not been growing in that instance the first generation is happy the next generation okay fine but each subsequent generation is getting less and less and less compared to what they expected and that's the situation that we're in right now in other words the internal rate of return on contributions was almost infinite at the beginning of the system the first generation paid in almost nothing and they're getting back a lot but as you go through time if they're getting less and less in fact it's so small you have to expand it with a microscope and you see that on average it's less than 2% so if people are getting such a bad return I'm often asked why don't we just invest the money in other words why do we continue this pay as you go system where people are getting less and less through time the problem is that we have an obligation to today's retirees most of the money today goes to pay past generations who got a good return because they paid little and got a lot back but there's no money around to invest unless you stopped paying today's retirees which is politically very unlikely and so you need some kind of transition financing to move away from an old-age pay-as-you-go scheme toward a funded scheme now of course all of us are facing exploding pension costs here we have the public finances the pension expenditure as a percent of GDP u.s. is around 6% UK Spain up here Germany Greece and Italy I think already what 15% or so so these exploding pension costs are already in place before the population is very old part of the reason is the benefits are quite high not in an absolute sense but as a percentage of average income so this is Western Europe and this dotted line refers to the 50% replacement rate measure it's not a gold standard it's just a number to compare it to in the US our typical Social Security benefit is about 40 percent of average wages and here I understand that some of the recent reforms have have reduced the rate to what about 55 percent from something I was hearing so it's still very high Italy is still well above what some of the other countries have been offering Eastern Europe quite high even Asia has quite high benefits so we're all in the same boat together now of course retirement ages have to rise there is no way to finance such high benefits with a shrinking workforce and it's happened in some cases Italy has already raised the retirement age somewhat unfortunately France has had a very difficult time trying to push through increases in retirement ages there was an effort and then I understand recently that mr. alland the new head of France has reversed the retirement age increases and this leads to huge protests in Barcelona I was there two years ago and the response to the Prime Minister's a effort to raise retirement age to from 65 to 67 we also have of course France they wanted to stick at 60 and they're going to be able to return to that and even the kids are worried about pensions today all generations are beginning to fight these changes I'm 84 and mad as hell as she says in the UK the policemen say their pensions are being stripped and they're ending up with nothing and in the u.s. the seniors occupy Chicago with the same complaint don't cut my pensions don't change anything meanwhile what are the international organizations telling us the government's must continue reform to ensure that income is socially as well as financially sustainable so this brings us to the top level of the discussion what are we going to do about global retirement risk management it's not about Italy it's not about Greece it's not about the US or Germany or friends we're all aging together I think this is an important point 20 years ago the finance guru said oh all you have to do is diversify your portfolio's you'll be fine so you have countries with different economic fortunes one goes up one goes down that's not true anymore we're all aging and there's no way out of this and global retirement risk management would refer to things like global aging epidemics worldwide asset meltdowns unfortunately there's not much you can do about that we're all in the same boat together in fact the only way that you might be able to spread global risk is through time but the only way you can spread global risk through time is with unfunded pay-as-you-go systems which we just saw got us into a lot of trouble so there really is no good answer at that level and demographic change is marching on Western Europe this is the fraction of people aged 65 plus 2 the population younger than 65 Western Europe here all of Europe Eastern Europe even Asia because of especially the one-child policy in China they're aging very quickly before they get there getting rich it's quite a challenge all around the world total longevity life expectancy is going up fertility rates are going down somewhat different between developed and less developed countries but we're all heading the same direction and the medical journals now say actually a hundred is young we're all going to live in the future to a hundred and ten in the UK they're now using 125 as the outermost year to calculate life expectancies and pensions well I'll get it later so just to illustrate last couple of slow what this will mean visually this is the percent of the population sixty five-plus in the year 2000 and you notice the white countries have less than 7.5% old and as it gets darker and darker the fraction of people over the age of 65 goes up and right now Europe is leading the way in successful ageing or perhaps unsuccessful ageing but no country has this blue and white color indicating 30 percent or more so the demographers make a projection what will the world look like in 2050 and the world is going to be very very different this is the fraction of the world that will have 30 percent or more of the population over the age of 65 there's very little geographical opportunity for diversification with the exception maybe of Africa which has lots and lots of other problems so where does that leave us well I'm sure I've depressed you that's what economists do and if you just heard George Soros a moment ago that was even more depressing what can we do what are the opportunities here I think we have to reinvent retirement at the turn of the previous century in the year 1900 people didn't retire in the year 1900 the life expectancy was around age 40 hard to believe and people worked in the fields if they could if not they worked at home taking care of the family but they worked until they died then we had this middle-class phenomenon of retirement throughout the 1950s 60 70s until now I think retirement has to be reinvented again we obviously have to invest much more in financial literacy we have to build our human capital a theme of this conference build our families build our communities we're going to have to save more invests martyr protect against longevity to the extent we can pass that on through financial products work a lot longer maybe make home equity accessible and restructure pensions so just to make sure you're not too depressed I leave you with this small cartoon here's the financial advisor he's talking to his clients an older lady an older man he says I had to make some adjustments so your new retirement date is 2065 and that's the future that we have so thank you very much we have two books I wanted to mention both of these with a roll by anna maria luz oddly this one is our new book on financial literacy this one is overcoming the saving slump and we have a website which I encourage you to access and a blog that Anna Maria has successfully launched so with that I'd like to stop take your questions and I appreciate your attention Thanks Thank You professor Mitchell while I'm still I'm - in order to give you a chance to put forward some question or to send a piece of paper with a question on it maybe I can put some first question to Professor Mitchell that is in your last chart you or didn't have the politicians to reform so populist politicians who try to do shortcuts not for 2050 but for 2013 so we are I'm personally from the generation of the baby boomers and the rational thing would be to have in my country a reserve fund for the four suppli for supplement of money when these baby boomers and need some pension but politicians think it's better pay more now pay more money to pensioners now because you get maybe more votes or more complicated example could be - it all depends also on text if you have low spending by the state you have low taxes but if you have a politician who says I will spend now take out that now and text later so this is when generation generations that are working now will have maybe less pensions and even have to pay a debt so the question is how do we integrate the politicians in this picture and in the end and then is what is the questions that journalists economists illiterate economists illiterate consumptions literate consumers should put to those politicians to put on their on the piece of paper in a demonstration to say that maybe they are cheating right now for the future but maybe people are not literate enough to see and through until 2050 so the difficulty with trying to change politicians minds as you correctly note is politicians have a short-term focus and they want to get reelected and the best way to get reelected is to promise much and not tax very very much I think one of the problems with pensions too is that they're very complicated the accounting is complicated the financial issues are complicated but people whose job it is to represent us can be forced to make these more transparent so for example if a city the city of Philadelphia where I live has a pension fund that is about thirty-four percent funded not very good and they're projecting big increases in the future however the city is also facing a recession they have not enough taxes that to deposit into the pension fund so instead of depositing the money to secure the teachers and the police and the firefighters pension fund instead the mayor who went to my school I liked him very much but the mayor said ah it's too expensive to fund the pension so instead of amortize the empty obligation or filling the debt over 20 years which is the current rule we'll extend it to 40 years so we have twice as long to fill the debt but the problem is this means that consumers are consuming today police services firefighter services garbage collection services teacher services and they're passing the bill to my grandchildren so the pricing is absolutely wrong in this setting and my view is that it's possible to do a better job if we force the politicians to report the long-term cost consequences of what they're doing today a different way that the markets might work is that if we realize there's a lot of pension underfunding this can have an influence on property values so it has been demonstrated in some research that regions or cities that have very underfunded pensions this is capitalized in the value of the land because they know sooner or later the taxes will have to rise to be able to capture the the needed money so you don't really escape it it's just hidden it's like the big shell game with the piece it's there it's just hidden if I put another question so in this case it's too simple to say you just put your deficit role as the Europeans put in you what what would you like the rule well European countries have now had this agreement to put a zero deficit rule in their constitutions but maybe you want a different sort of rule in the Constitution if you look also at the long-term consequences I think the issue is not what's in the Constitution I think because there's always smart people that can get around the rules and regulations with different financial products or different kinds of mechanisms I think that to be honest a defined contribution scheme where you the employee have responsibility for contributing for investing and for paying out is much more likely to capture people's attention and to make them understand they're responsible for themselves I think it's almost inevitable that a government-run public pension is going to suffer the political tensions and will be mismanaged are there any examples that you would like to tell us of a very catastrophic or a very innovative way that countries or communities have adopted too many catastrophes are available Argentina was a case where they stole all the assets of the pension fund not a good not a good model a good model I think is perhaps Australia in the country of Australia they have a national mandatory pension scheme where you must invest nine percent of your salary every year you have choice on where to invest there's some ample choices and if you move from one employer to another it's still your money you don't leave it behind so the pension does not mobility the pension makes mobility feasible which it should be did you have a question the back No I think Paula sarivola was happy arrest good evening