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AP IMPACT: The world braces for retirement crisis

WASHINGTON (AP) — A global retirement crisis is bearing down on workers of all ages.

Spawned years before the Great Recession and the financial meltdown in 2008, the crisis was significantly worsened by those twin traumas. It will play out for decades, and its consequences will be far-reaching.

Many people will be forced to work well past the traditional retirement age of 65 – to 70 or even longer. Living standards will fall, and poverty rates will rise for the elderly in wealthy countries that built safety nets for seniors after World War II. In developing countries, people’s rising expectations will be frustrated if governments can’t afford retirement systems to replace the tradition of children caring for aging parents.

The problems are emerging as the generation born after World War II moves into retirement.

“The first wave of under-prepared workers is going to try to go into retirement and will find they can’t afford to do so,” says Norman Dreger, a retirement specialist in Frankfurt, Germany, who works for Mercer, a global consulting firm.

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THE FINANCIAL CRISIS MAKES THINGS WORSE

As if demographics weren’t burden enough, the outlook became worse when the global banking system went into a panic in 2008 and tipped the world into the worst recession since the 1930s.

Government budget deficits – the gap between what governments spend each year and what they collect in taxes – swelled in Europe and the United States. Tax revenue shrank, and governments pumped money into rescuing their banks and financing unemployment benefits and other welfare programs.

That escalated pressure on governments to reduce spending on pensions or raise revenue. Hungary took one of the most draconian steps: It demanded that its citizens surrender their private retirement accounts to the government or give up their government pensions. Poland seized a portion of private retirement accounts. Ireland imposed an annual tax on retirement accounts.

The Great Recession threw tens of millions of people out of work worldwide. For many who kept their jobs, pay has stagnated the past five years, even as living costs have risen, making it tougher to save for retirement. In addition, government retirement benefits are based on lifetime earnings, and they’ll now be lower. The Urban Institute, a think tank in Washington, estimates that lost wages and pay raises will shrink the typical American worker’s income at age 70 by 4 percent – an average of $2,300 a year.

Leslie Lynch, 52, of Glastonbury, Conn., had $30,000 in her 401(k) retirement account when she lost her $65,000-a-year job last year at an insurance company. She’d worked there 28 years. She has depleted her retirement savings trying to stay afloat.

“I don’t believe that I will ever retire now,” she says.

She also worries about her children, all in their 20s: “I don’t think my three sons will ever retire” because pay raises have been so weak for so long.

Less money from a government pension isn’t the only factor weighing on future retirees. When the financial crisis struck five years ago, the world’s central banks cut interest rates to record lows to stop the economic free-fall. That also punished people with much of their money in investments that pay interest.

“The low-interest rate environment has been brutal,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. She points out that $500,000 in savings would yield $25,000 a year at an interest rate of 5 percent, just $2,500 at 0.5 percent.

The crisis also frightened many away from the stock market. Stocks can be riskier than other investments, but they yield more long term. Many investors have shunned stocks while the world’s stock markets have soared. In the United States, the Dow Jones industrial average has risen nearly 150 percent since March 2009. Japan’s Nikkei index is up 56 percent just this year.

The past five years have been so tumultuous that some people have been reluctant to invest at all.

Olivia Mitchell, who studies retirement at the University of Pennsylvania’s Wharton School, says her grown daughters rebuffed her when she urged them to save more for retirement. Stocks, they said, are too risky. And bonds don’t yield enough interest to be worth the bother.

Full report here…

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