Rising to the Challenges of Retirement
A look at the economics of COVID-19, climate change, income inequality, and other risks weighing on retirement systems.
COVID-19’s short and long-term consequences for retirement systems globally, climate change’s impact on retirees, the role of ESG investments in retirement planning, and the rise of income equality are among the numerous topics covered in this Natixis Access Series event – which coincided with the release of the 2020 Global Retirement Index.
Here are some excerpts from the talk.
What does this pandemic-driven economic crunch mean for retirees down the line?
Ed Farrington: It has very serious effects. Our retirement systems in the developed world are all standing on a three-legged stool. The first is, what are you doing to save for your retirement? The second is, what’s the employer doing to help you in creating a plan or creating a match? And then, what are policymakers or governments doing? What role do they play?
So, if you’re an individual and you’ve been saving through the workplace and you’re unemployed, that’s a disruption to your savings. If you are having financial pressures because wages are down or your hours are down, you’re more likely to withdraw from your accumulated savings, creating another potential gap.
The employer, similarly, faces this dilemma. Meaning, I’m trying to keep my business alive day to day. So, am I going to suspend my match? And then, what’s the impact of the recession on policymakers? It’s obviously dramatic. We’ve had this massive need to spend to increase public debt, and that will have long-term consequences. We’ve done things in the United States like payroll tax suspension. That has an impact on the systems that we rely on. So this is a real moment in time where we need a joint response. Individuals, employers, and policymakers all need to make sure we’re not only thinking short-term, but also have an eye toward the long term.
What’s the prognosis for recovery and the long-term outlook for retirement security?
Esty Dwek: I think we’re out of the worst of it. We had this extremely sharp, deep, and violent recession and we’re out of it. Now, the big bounce is also behind us and we need to continue to move forward. We’re going to need spending to keep coming through to keep this recovery going.
Once you think of the damage to growth this year, even if you have a good 2021, you’re still talking 2022–2023 before we even get back to 2019 levels. So, for individuals, probably whatever you’ve invested, that would have fallen with the market. Contributions and matches have fallen, as well. Ultimately, one of the longer-term consequences is we might need to work for even longer to continue to put money in these nest eggs.
As individuals, you want to try to maximize how much you save, especially in the good years. I saw an article once about budget advice and one of the conclusions was “You’re only saving enough if it hurts.” Given all of the uncertainties that we’ve talked about, you have to try to build up your savings and not completely be dependent on a lot of these elements around you.
What might the impact of climate change be on retirees?
Ed Farrington: I think about “What is the life experience of the individual?” “What expenses might they incur because of a change to their overall environments?” Many of our citizens, as they start to think about retirement, have moved to warmer climates, like Florida or Southern California.
We’ve seen tremendous growth in the southeast of the US. Well, these are the very places that will be the most disrupted the earliest from climate change problems. So it will visit our older population fast and hard. They’ve been relying on maybe a lower cost of living and now they might have to move. There’s disruption that’s going to show up and this doesn’t have to be cataclysmic, but we have to begin to think about it, discuss it, and plan for it so that people are getting a modest handshake in this. This is a real risk because it’s financial and it’s personal. And they need to start accounting for it as they do every other risk in their life.
What is the relevance of ESG investing to retirement planning?
Esty Dwek: I think we have a generation that’s going to want to have more ESG (Environmental, Social, Governance) as part of their pension investments. I think it’s something that’s going to become more and more mainstream. We’ve seen in a crisis like this 2020 pandemic that ESG strategies typically proved relatively defensive. Some of it because structurally they tend to have higher allocations to healthcare and technology. But I think we’re also going to see something of an impact of wanting to have an ethical pension investment for our younger generation going forward.
How might income inequity have long-term implications for individuals and their retirement security?
Esty Dwek: Unfortunately, it’s a huge problem for women, for minorities. We know that very often it’s lower-paying jobs, and means lower contributions from the start, which means you end up with less when you’re starting to save. It’s been like this for many years. But I think I’m going to try to flip it into something positive and say with everything that’s happened in the US this year and the protests, we’re going to start to change. Maybe we’re finally going to find a way to address this starting with income, but also with savings so that when you get to retirement, everyone is at that level. But it’s a long road ahead of us.
Take a look at the 2020 Global Retirement Index to find out where your country ranks in regard to retirement security.
All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor's overall performance depending on whether such investments are in or out of favor.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of September 29, 2020 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.