WEF: Workers need to save 10-15 pct of annual salaries for reasonable level of retirement income

Published 18.06.2017 22:51

To obtain a reasonable level of retirement income, workers should save at least 10 to 15 percent of their annual salaries, according to the "We'll Live to 100 – How Can We Afford It?" report published by the World Economic Forum (WEF).

Noting that health services and nutritional advancements have increased the probable life span of the world population, the report also said that the number of people over 65 will increase from 600 million today to 2.1 million in 2050.

The report, which pointed out that close to half of the world's employees are involved in the informal, unorganized sectors, emphasized that 48 percent of the population who reach the retirement age do not receive a pension.

Moreover, the per capita saving rate was reported to be low in many countries, according to the report, which emphasized that 10 to 15 percent of your annual salary needs be saved in order to have a reasonable level of income in retirement.

"Every year people need to decide how much to save, which investments to prefer, when to retire and what amount of their savings to use when they are retired," the report said.

"Today, individual savings rates in most countries are far lower. This is already presenting challenges where traditionally defined benefit structures would have provided a guaranteed pension benefit. Now, as workers look at their defined contribution retirement balances, with no guaranteed benefits, they are realizing that the retirement income their savings will provide will be much lower than expected," the report continued, adding that it will remain to be a challenge unless the importance of higher savings rates is better understood and communicated.

"Given the current long-term, low-growth environment, it is unrealistic to expect that saving approximately 5 percent of a paycheck each year of your working life will provide a comparable income in retirement," the report said.

Lack of easy access to pension

Listing the main problems related to the retirement period, the report noted that many employees in developed and developing countries have difficulties in accessing saving products.

Moreover, saying that many of the workers lack easy access to pension plans, the report noted that the incentives, which could encourage money saving habits, were not sufficient.

"In many cases there are options available, but take-up is low. The lack of opportunity to begin saving, and encouragement to make putting money aside a habit, is severely limiting many people's ability to accumulate savings," the report said.

Long-term, low-growth environment

Furthermore, the report noted that over the past decade, long-term investment returns have been significantly lower than historic averages, which caused pension funds to remain low.

"Equities have performed 3 percent to 5 percent below historic averages and bond returns have typically been 1 percent to 3 percent lower. Low rates have grown future liabilities, and at the same time investment returns have been lower than expected and unable to make up the growing pension shortfall," the report said.

"Taken together, these factors have put increased strain on pension funds as well as on long-term investors that have commitments to fund and meet the benefits promised to current and future retirees. Individuals have also been impacted and have seen smaller growth in their retirement balances than in the past," it added.

Low levels of financial literacy

Moreover, the report indicated that levels of financial literacy are very low worldwide.

"This represents a threat to pension systems which are more self-directed and which rely more on private savings in addition to employer, or government-provided, savings," the report said.

In the report, which stated that financial literacy is a guide to when and how much people should save for retirement, it was noted that women and young people have more difficulties in making investment decisions.

The report said that most people are not able to answer questions on basic financial concepts.

"This is increasingly important in pension systems that require individuals to make key decisions. The lack of awareness of the basics on how interest and returns will compound over time, how inflation will impact savings, and the benefits of holding a broad selection of assets to diversify risks means that many individuals are ill-equipped to manage their own pension savings. Some groups are particularly vulnerable, including women, the young and those who cannot afford, or choose not to seek, financial advice," the report concluded.

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