This article is part of a series in which OECD experts and thought leaders — from around the world and all parts of society — address the COVID-19 crisis, discussing and developing solutions now and for the future.
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Planning for tomorrow may seem like wishful thinking when life today is tough. COVID-19 is disrupting the livelihoods of many around the globe. On top of the health threat, many people have lost their jobs, especially in hard-hit sectors like tourism, retail and aviation, making it harder to save for retirement. In the midst of a crisis, this can make tapping into retirement savings appealing to alleviate short-term financial pressure. Panic can also make people withdraw their savings when they see asset values plummeting, as we saw earlier in 2020 when financial markets fell sharply as governments introduced preventive health measures to limit the spread of the virus.
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At moments like these however, it is critical that we stay the course and keep saving for retirement. Although more of a challenge in times of crisis, it is essential that assets continue to accrue for retirement. Larger savings improve the adequacy of the future retirement income. In the first chapter of the OECD Pensions Outlook 2020, we estimate that a one-year pause in contributions could lead to a reduction in income at retirement of around 2-3%. Withdrawing assets before retirement could have an even larger impact on future retirement income.
In this context, policy makers need to find a balance between protecting people from the short-term impacts of COVID-19 while ensuring that they keep the long-term commitment of saving for retirement. Many governments have introduced subsidies to support employees and employers, so that workers can still earn an income from which they can build pensions and save for retirement. Some countries, such as Iceland, the Netherlands and the United Kingdom, have gone the extra mile by directly subsidising contributions to retirement savings plans (at least to some extent and for some time), alleviating employers of this expense.
Staying the course can also harness the potential of financial markets and help achieve better investment returns over the long run. Fluctuations in asset values are inevitable during the lifetime of a retirement portfolio. For example, despite the market meltdown during the 2008 financial and economic crisis, retirement asset valuations were back to 2007 levels about two years later in most OECD countries. Preliminary OECD estimates in the OECD Pension Markets in Focus 2020 suggest that the value of assets in retirement savings accounts recovered their pre-COVID-19 levels by the end of Q3 2020, thanks to the recovery of financial markets in the second and third quarters. Therefore, as long as people do not sell their assets during a downturn in the markets they do not materialise the losses, and their portfolios can eventually recover and resume their long-term trend upwards.
The pandemic has highlighted a lack of financial resilience in many households around the world, emphasising the importance of having savings for emergencies. Access to retirement savings should remain an option of last resort, based on the specific circumstances of an individual, such as financial distress or critical illness.
Introducing long-term savings arrangements, that combine a savings account earmarked for retirement and a savings account for emergencies, could make retirement savings more resilient. Singapore, for instance, has set up different savings accounts for different purposes: people save in three different accounts, one for retirement needs, one for housing and one for medical expenses. The United Kingdom is currently testing another idea, with a hybrid product linking an emergency savings account and a retirement savings account. The idea is to offer a degree of upfront liquidity when needed through the emergency savings account, while protecting long-term savings for retirement.
The OECD Pensions Outlook 2020 provides policy guidelines to strengthen the resilience of retirement savings arrangements and ensure they deliver the best outcomes to members.
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