Pensions fall as financial market turmoil continues

Pension fund Dec11.pngIncreasing life expectancy is an enormous benefit for today’s population. We can all, whether in developed or developing countries, expect to live a decade or more longer than our grandparents’ generation.

Yet pension systems haven’t adapted to this change. The money we now save is still only enough to pay for a few years of retirement, not a few decades. This will have a major impact on future demand levels.

The chart above comes from the newly-published chapter 7 of our ‘Boom, Gloom and the New Normal’ free eBook. It shows the mountain that has to be climbed to secure a decent pension income.

It is based on official US earnings statistics, starting from 1979. Over the period to the end of 2010, a worker on median wages would have built a pension fund of $242k (blue column), assuming that they:

• Earned median wages from 1979 – 2010
• Saved a regular 10% of this income, a total of $81110
• Gained S&P 500 Index growth (red line) on their investment each year.

At the beginning of 2011, this fund would have bought an annual pension of ~$10k/year, with inflation proofing. Today, it would be lower, as US interest rates have fallen whilst the S&P 500 is below end-2010 levels.

No one chart can cover all circumstances. The situation outside the USA will also be different. But it highlights the potential income drop that employees face on the day they retire. In this example, income drops from median earnings of $39k to a pension of ~$10k.

The Boomers drove the consumption boom between 1982-2007. They are now starting to retire in large numbers. Already 272 million people, 29% of the Western population, are in the 55+ age bracket.

This is why we argue in chapter 7 that companies need to refocus away from the ‘middle market’ that has driven chemical and polymer sales during our lifetimes. The ‘value sector’ will instead drive future profits.

Those who shut their eyes, and hope that things might one day return to the ‘old normal’, are likely to be very disappointed indeed.

International eChem/ICIS are launching a new workshop programme to help companies plan for success in the New Normal. Please contact the blog by clicking here for further details.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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