Coping with Changes in Government Funding of Retirement Systems

Chia-Li Chien, PhD, CFP®, PMP® Jan. 28, 2018

I have called my mom once a week since I first came to the United States back in1988. I married my husband in 1991 and did not return home to Taiwan as originally planned. I have lived in the U.S. far longer than I lived in my birthplace of Taiwan. When I call my mom, she tells me what’s going on in her week. Sometimes she updates me on her Monday Karaoke class where my parents sing in Japanese and English with a group of seniors. This past weekend, she was upset that Taiwan’s government pension got cut in half due to a recent policy changes. My parents are well off, but the 50 percent reduction in pension was not a pleasant experience. There are millions of pensioners affected. She argued that no other country in the world would do this to their senior citizens. She vented angrily for a while until I shared the research I did three years ago on this very issue.

Global Pension and Social Security Crisis

Government-funded social safety nets and entitlements are subject to change, including pension systems. There are three pillars in the retirement-funding pension systems shown in a 2005 report from the Inter-American Conference on Social Security: 1) public PAYGO (pay as you go like a U.S. Social Security retirement benefits) systems, 2) mandatorily funded systems, and 3) voluntarily funded systems. Starting as early as 1981, some countries replaced PAYGO with mandatory and voluntary funding (public or privately managed). Among the latter are Hong Kong, Italy, and Chile. The third pillar or voluntary retirement funding is most frequently found in the United States, United Kingdom, and Canada, according to Bonasia and Napolitano’s 2010 research.

In 1981, Chile led the worldwide wave of privatizing or replacing PAYGO shown in Figure 1. But the wave abruptly stopped, primarily due to market failure during the 2008 global financial crisis. In responding to the global financial crisis, countries like Hungary moved back to PAYGO. Poland made a permanent 68.5 percent cut in the government’s level of contribution. In the U.S., there is a lot of talk about replacing all or part of Social Security or PAYGO with a privatized mandatory or voluntary system. Whatever the solution is, retirement-funding pension systems will continue to face market-risk challenges and not effectively meet the entire retirement funding need.

Be like Grace and Frankie

(Image source: https://www.syracusenewtimes.com/age-is-just-a-number-in-netflixs-grace-and-frankie/) The government will always do what is best for the country and individuals often suffer from any policy changes in the retirement systems. Individuals need to safeguard their own nest eggs, through controlled spending, and/or continuing to work. Look out for yourself, as no one else will look out for you.

I love watching Jane Fonda’s Netflix series of Grace and Frankie. The series is about two retired divorcees played by Jane Fonda and Lily Tomlin. Together, they face financial, emotional, and physical challenges as they cohabit in a beachfront home. (Cohabiting is a way to control spending.) Jane Fonda is 80 today, and Lily Tomlin is 78; both are still working in a different capacity such as acting in Grace and Frankie and serving on many boards. They both are physically active and continue working in meaningful ways. My mom is a bit younger than Jane Fonda, but in many ways like Jane Fonda, Mom lives a very meaningful and fulfilling life.

I advocate for clients to work longer in their own businesses. When clients tell me that they want to stop working and travel around the world, I always say, enjoy the world! But when you get tired of travel, come back to work in your business and stay, because no one has asked you to leave yet! Even if you sell to a third party, you can always negotiate consulting opportunities. Continuing to work holds true for those who work for other employers as well. We may not all have the beauty and slim figure of Jane Fonda. But if you take good care of yourself, and have good health, you can work on something you enjoy or do meaningful work for your community such as serving on community boards. Don’t put your bet on the government and don’t get angry about their policy change. Like I said to my mom, if you live well because you have good health, control spending and are actively involved in the community, you will always win regardless of how much the government may take away from your pension or cut your Social Security retirement benefits.

Reference:

Bonasia, M., & Napolitano, O. (2010). Can Shift To A Funded Pension System Affect National Saving? The Case Of Iceland. Theoretical & Practical Research In Economic Fields (De Gruyter Open), 1(1), 12-26.

Inter-American Conference on Social Security. (2005). An Overview of Notional Defined Pension Plans. CISS Working Paper, 05112.

Orenstein, M. A. (2013). Pension Privatization: Evolution of a Paradigm. Governance, 26(2), 259-281. doi:10.1111/gove.12024.