US - Goldman Sachs estimates that US companies will have to raise their contributions to defined benefits pension plans by 80 billion dollars (79.67 billion euros) per year.
The bank says in new research that US businesses are currently contributing 40 billion dollars a year to their defined benefit schemes. “This is grossly insufficient,” the report states.
Goldman economist Jan Hatzius states: “We estimate that contributions will need to rise to 120 billion dollars per year. This implies an 80 million dollar hit to annualized cash flow.”
Goldman’s estimates are based on an analysis of the rate of return and the size of future benefits.
Hatzius estimates the growth rate of future benefits and assets at 5%, which compares to a 4.5% estimate for the growth of gross domestic product. Hatzius states that benefits have tended to grow faster than GDP as the ageing population “seems to have outweighed the migration of workers from defined benefits into defined contribution plans”.
According to Hatzius’ calculations, a contribution of 40 billion dollars implies a rate of return of just over 10%. Conversely, a more realistic rate of return – 6% - implies a rise in contributions to 120 million dollars a year, a rise of 80 million dollars.
“It is predicated not on the current level of stock prices, but on the future rate of return – in other words contributions will eventually have to rise even if the stock market recovers part of its losses.”
The report acknowledges that the 80 million dollar figure is less striking than some other reports, but notes that it refers not to a one-off hit, but an ongoing cost.
And the effect of the extra expenditure is large enough to have an impact on the wider economy. Goldman expects the adjustment, if it were to occur over a single year, to trim seven percentage points from business investment growth and 0.8 percentage points from real GDP growth.