Kiplinger’s 25 Favorite Funds

US Stock Funds

• Akre Focus — AKREX
• Arbitrage Fund R — ARBFX
• Baron Small Cap — BSCFX
• Dodge & Cox Stock — DODGX
• Fairholme Fund — FAIRX
• Fidelity Contrafund — FCNTX
• Fidelity Low-Priced Stock — FLPSX
• FPA Crescent — FPACX
• Pimco CommodityRealRet Strat D — PCRDX
• Primecap Odyssey Growth — POGRX
• Selected American Shares S — SLASX
• T. Rowe Price Equity Income — PRFDX
• T. Rowe Price Mid-Cap Growth — RPMGX
• T. Rowe Price Small-Cap Value — PRSVX
• Vanguard Dividend Growth — VDIGX
• Vanguard Selected Value — VASVX

International Stock Funds

• Dodge & Cox Intl Stock — DODFX
• Harbor International — HAINX
• T. Rowe Price Emg Mkts Stock — PRMSX

Bond Funds

• Dodge & Cox Income — DODIX
• Fidelity Intermediate Municipal Income — FLTMX
• Harbor Bond Institutional — HABDX
• Loomis Sayles Bond — LSBRX
• Vanguard Infl-Protected Secs — VIPSX
• Vanguard Short-term Investment-Grade — VFSTX

More Information on Kiplinger’s 25 Favorite Funds

Before you lapse into complacency, though, consider some of the risks out there. In the U.S., debt among all levels of government is too high. The same goes for household balance sheets. Employment, income growth and consumption may remain subdued for years to come, weighing down economic expansion. Interest rates, which essentially declined for nearly 30 years (lifting bond returns), have nowhere to go but up. And the picture is no cheerier in Japan and most of Europe.

Many risks — excess leverage, government deficits, higher taxes, currency instability, defaults by nations — will stay with us for years, so it might be time to build more diversification and safety into your portfolio. And because you can make a plausible case for inflation or deflation, you might also want to build in protection against either occurrence.

It is with these goals in mind that we made some adjustments to the Kiplinger 25, our favorite no-load funds. In particular, our new list includes a short-term bond fund and a merger-arbitrage fund. Our method of picking funds remains the same. We prefer funds with low fees run by managers with long, solid track records who work for fund families we trust. We like funds with low turnover that investors can hold for the long term.

New Funds on the List

Vanguard Dividend Growth (NYSE: VDIGX – News) has all the attributes we look for in a fund, plus a strategy we find appealing. Manager Don Kilbride aptly calls his method of investing in companies that steadily increase their payouts “simple but not easy.” The key is execution.

This large-company fund’s mandate is also simple: Increase dividend income by at least three percentage points in excess of inflation each year. Kilbride projects that dividends paid by the 49 stocks his fund currently holds will grow at an annualized rate of 11% over the next five years. That would boost the fund’s effective yield from 2.1% today to 3.6% in five years based on today’s net asset value.

Kilbride says that if you can correctly identify stocks with a rising stream of dividends, it “leads to capital appreciation over time.” You also get companies with some nice characteristics: strong balance sheets and cash flows; relatively little need for big capital expenditures to maintain profitability; and lower stock volatility. Although the fund lost 42% during the 2007-09 bear market, that was 13 percentage points less than the decline of Standard & Poor’s 500-stock index.

In constructing his low-turnover portfolio, Kilbride likes to use a “barbell strategy” of combining companies that have boosted their payouts for decades, such as Procter & Gamble and Sysco, with a new generation of dividend growers, including Staples and Western Union.

Primecap Odyssey Growth (NYSE: POGRX – News) is a relatively new large-company growth fund with a fine pedigree. Primecap’s five managers have posted outstanding results running three funds for Vanguard with a similar investing style. Primecap invests in growing companies selling at attractive prices and holds their stocks for seven or more years, on average. Odyssey Growth is allocating 63% of its portfolio to health care and technology.

Chuck Akre is a familiar face with a new fund. When Akre departed FBR Focus last year, we decided to follow him and switch to his newly debuted fund, Akre Focus (NYSE: AKREX – News). The main reason was Akre’s compelling track record: During the nearly 13 years that he ran FBR Focus, the fund returned an annualized 13%, trouncing the Russell 2000 Growth index of small, rapidly growing companies by an average of ten percentage points per year.

Akre hasn’t changed his method, which is to identify highly profitable small and midsize businesses with the ability to generate earnings growth of at least 15% annually. But he says that the scarring experience of the financial earthquakes of 2007-09 has made him more conscious of how big-picture economic issues affect consumers. One of his key takeaways is that “the plight of the consumer is significant and real,” which implies much more austerity in the coming decade than during the past ten years.

One new focus for Akre is discount retailers. “People still go to stores, but they’re stingier with what they spend,” he says. He’s also hunting for companies that are capable of generating revenue growth even in a soft economy by selling to other businesses. His largest position is in FactSet, number three in the financial-data business, after Bloomberg and Thomson Reuters.

Running an international fund is a challenge these days. Japan, the largest developed foreign economy, has basically been trapped in deflation for 20 years. The British economy is drowning in debt, and much of the rest of Europe is also ailing. One reason we like Harbor International (NYSE: HAINX – News) is that the fund, which has returned an annualized 12% since its inception in 1987, has demonstrated an ability to perform well across business cycles and shifting landscapes.

Hakan Castegren, born in Sweden and based in Bermuda, has been at the helm since the fund started. Today he is joined by four co-managers who live in Boston. Ted Wendell, one of the co-managers, says a consistent theme from the beginning has been to look out three to five years and identify companies that could increase profit margins by boosting sales, cutting costs or, best of all, doing a bit of both.

For example, Wendell points to Nestle, the Swiss food-and-beverage giant, as an example of a company that increases revenues and chips away at expenses nearly every year. As with many stocks in Harbor’s concentrated portfolio, the fund has held Nestle for more than a decade. On average, it holds stocks for seven to ten years — an eternity by fund-industry standards.

Harbor is well suited to serve as the core of your foreign-stock holdings. If you can pony up $50,000, buy the institutional-class shares, which charge a much lower annual fee than the investor class (0.83% compared with 1.20%).

Funds That Zig

Modern portfolio theory teaches that if you skillfully combine investments that move out of sync with one another, you can increase your portfolio’s return while reducing volatility. But it’s getting tougher to identify investments that zig when others zag. For example, the degree to which emerging-markets stocks and commodities move with the S&P 500 has risen dramatically in recent years.

We’ve added Arbitrage Fund (NYSE: ARBFX – News) to our list this year because of its ability to march to its own tune. This fund invests in takeover stocks after a merger or acquisition has been announced. There’s typically a gap between the share price of the target after the deal is disclosed and the closing price of the deal. Arbitrage seeks to capture the final few dollars — or cents — of appreciation by investing in deals that are most likely to reach fruition.

The beauty of Arbitrage is that it has a low correlation with both stocks and bonds. John Orrico, the fund’s senior manager, notes that merger-arbitrage strategies have historically captured about two-thirds of stock-market gains while suffering only one-third the volatility. During the 2007-09 bear market, Arbitrage remarkably gained 1.6%. Since its September 2000 launch, the fund returned 6% annualized, an average of six points per year better than the S&P 500.

Orrico, who runs the fund with Todd Munn and Roger Foltynowicz, says that at any given time his team is typically studying 120 to 150 transactions and will invest in 40 to 50 of them. He particularly likes those of $500 million or less, because small deals are likely to attract more competing bids with higher offers.

You won’t get rich holding Vanguard Short-Term Investment-Grade (NYSE: VFSTX – News), but that’s not the aim. At a time when yields on money-market funds are insulting and many investors fear rising interest rates, there are worse places to park short- to medium-term savings. Short-Term has produced gains every year for the past 15 years, except in 2008, when it shed a modest 4.7% — a loss it more than recouped with an equally implausible 14% rebound in 2009. The fund yields 2.4%.

Bob Auwaerter has managed the fund since 1983, which may explain some of the consistency (Greg Nassour became a co-manager in 2008). Auwaerter, who’s also head of Vanguard’s entire fixed-income group, can tap into a pool of about 40 credit analysts who are divided into teams focused on categories such as investment-grade bonds, asset-backed securities and Treasuries.

Auwaerter expects a subpar economy because of anemic job growth, consumers’ inability to borrow and a growing tendency to save rather than spend. He thinks this implies that interest rates will rise only slowly. The fund’s duration (a measure of interest-rate sensitivity) is 2.2 years, so a one-percentage-point rise in interest rates should translate into a 2.2% decline in the fund’s net asset value.

Excuses abound, but here are the most common ones:

Everyday Expenses: Some 56 percent of respondents said they had “little or no money left” to save for retirement after paying for daily expenses, including food, housing, and transportation.

Late Start on Retirement: The same percentage of respondents reported that they got a late start on their retirement savings. Starting late means losing out on years of compounding, which can have a severe negative impact on the final amount saved at retirement. For example, if you start saving $12,000 a year at age 25, you’ll have $3.2 million by age 65, assuming an 8 percent rate of return. If you save the same amount at age 40, you’ll only have $915,000.

Parenthood: Parents say that having children makes it more difficult to save money for retirement. About half of female breadwinners and four in ten male breadwinners said they scaled back their own retirement savings in order to put more money towards their children.

Longer Life: Living longer is a good thing, of course, but it also means retirees need more money – enough to last into their 80s and 90s.

Do any of those reasons sound familiar? If so, it’s time to get cracking – and up your savings so you don’t face deprivation during what should be your golden years. The first step is to calculate just how much money you should be putting away.

Most people fail to do any sort of calculation at all, so this step will already put you in a better position. You can find a good retirement calculator with a quick web search, but be sure to use one that incorporates tax rates, inflation, and an adjustable rate of return so the results are as accurate as possible. Some good ones include TD Ameritrade’s WealthRuler, Bankrate.com’s retirement calculator, Transamerica’s worksheet.

Once you’ve worked out just how far you’re falling short, it’s time to do something about it. Here are four suggestions:

Save More, Not Less. Most financial advisers say taking money out of the market when shares are down or you really need the cash is the wrong move, because you miss out on any future gains and compounding in the meantime. Plus, you might have to pay a penalty for early withdrawals.

Change Your Budget. Diane Young of TD Ameritrade says the biggest mistake people make is underestimating how much they can put away for later. “They’re thinking they can’t save more than they’re already saving. But you can. You don’t have to go out to dinner four times a week or spend $5 on coffee,” she says. Even saving such a small amount pays off in the long run, she says.

Follow Tried-and-True Strategies. Diversify your investments through index or mutual funds, and decrease your exposure to stocks by shifting into safer vehicles such as bonds and cash as you approach retirement. A new survey from Vanguard found that investors are increasingly looking to low-fee funds, which keeps more money in their accounts.

Then Forget About It. There’s no good reason to follow every dip in the market. Instead, focus on a hobby, get some fresh air, and spend time with friends.

Today many debt-burdened European countries as well as the United States are considering raising the age at which retirees can collect partial and full pension benefits. Not surprisingly, the fur has already begun to fly.

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“It’s always very difficult, and it can take years to make changes,” said pension expert Estelle James, who is a consultant to the World Bank.

Retirement ages vary between countries. While many have set 65 as the official age at which one can collect full benefits, some places favor an earlier break from the rat race.

Some groups of workers in Greece are now able to claim benefits in their 50s, while the retirement age for everyone else is 60 for women and 65 for men. A planned overhaul of the system would change all that.

Greece, as part of its broader austerity plan, has committed to bringing the minimum early retirement age up to 60 for everyone. And pension benefits for many will be reduced if they’re claimed between 60 and 65.

In France, 60 is the kick-off point for most people to collect full pensions if they’ve worked 40 years. Those who started work in their teens can collect benefits as early as 56. But there is a proposal to raise the age to 62. French unions last week expressed their displeasure with the idea in a nationwide strike.

So chances are they won’t like hearing this: 62 may not be enough for the long run.

In Europe and the United States, life expectancy and time spent in retirement have been increasing, while fertility rates and the number of workers paying into the social security systems have been falling.

“Not only are people living longer, they’ve been retiring earlier,” said John Turner, director of the Pension Policy Center.

In the late 1960s, men in Spain spent less than 10 years in retirement; now they spend more than 20, according to data compiled by the OECD and the Economist. In France, the time in retirement has risen from 10 years to almost 25. The jump in the United States is also large but not as drastic: from just under 10 years to roughly 18.

In fact, James said, even though the retirement age in the United States hasn’t kept pace with life expectancy, it comes closer than many European countries.

American workers who choose to retire early can start collecting partial Social Security benefits at 62; full benefits by age 66 (a number on track to rise to 67 by 2027) and an even higher benefit if they postpone retirement until they are 70.

From an economic point of view, Turner thinks that the early retirement age should gradually increase to 63 and the full retirement age to 68. That would bring retirement ages in line with life expectancy and help keep Social Security solvent in the long run.

Those who don’t want the age increased often note, rightfully, that not all workers are able to work until the official retirement ages either for health reasons or because their work is so physically demanding.

“Those issues are raised as if they’re overwhelming. But they’re not,” Turner said, adding that fewer than 10% of workers fall into these groups and that programs could be targeted to accommodate them.

Getting Beyond Age

Of course, increasing the retirement age is only one piece of the pension reform puzzle that spurs controversy. Changes to the taxes that support pension benefits and adjustments to the formulas that determine them are also on the table.

Many social security systems, like the one in the United States, are largely pay-as-you-go. Workers and their employers pay into the system and that revenue is used to support present-day retirees.

Since public pushback can limit how much policymakers can do at any one time, and because unforeseen circumstances such as an economic crisis can create new concerns, pension reform is rarely a one-and-done deal.

Some countries that have embarked on reform in recent years, such as Sweden and Germany, created fail-safe mechanisms that automatically adjust benefits as needed to keep their systems solvent.

“A lot of countries have instituted some rather basic changes in the system designed to make them more fiscally responsible,” James said.

Whether those kinds of changes will be accepted in the United States isn’t at all clear. But what is clear is that when U.S. policymakers choose to take up Social Security reform– which they haven’t done since 1983 — chances are good that every proposed change will make for a tough fight.

“I was very cross: it was the best job I’d ever had,” he said. “I felt particularly bitter about it because I had been helping to hold the place together.”

The school had come under new management and he was not getting on well with the headmaster.

“I shot myself in the foot,” he said. “I told him how old I was and I saw a look of dawning on his face.”

He had also let his trade union membership lapse. At the end of the academic year, he left and the school replaced him with a young Australian woman.

Now 69, Webster’s pension entitlement is limited to rights accumulated during 16 years teaching in the state sector, so his 56-year-old wife has returned to full-time work as a primary school teacher to help keep up the family’s income.

His youngest daughter at 19 is still living at home preparing to go to university. His oldest, 26, lives at home part of the time and after a long search has just secured a job as an assistant physiotherapist — she was one of 260 applicants.

Webster makes about one-third of his previous salary giving private tuition to students who come through agencies:

“I find myself teaching a huge range of syllabuses, I have to be more flexible, adapt more. It’s fun, but it’s not possible to earn the kind of money I was earning. (Students) can only usually come after school, and you don’t get paid for what you don’t do.”

Britain’s government is reviewing the legislation, dubbed Employment Equality (Age) Regulations, which prevents employers from forcing early retirement on those younger than 65 but gives only a right of request to over-65s who want to keep working.

Lobbyists for older people say the law is discriminatory, and in any case, fails to address the need to increase the labor force participation of older workers.

Webster, for whom any change would come too late, has two pieces of advice for older workers who want or need to keep their jobs: “Make sure they’re a member of a union — a strong union — and keep on the right side of their employer.”

(Reporting by Sara Ledwith)

So the maxim remains: mix it up, cherry-pick. Risk appetites differ but funds remain invested in equity, and some are increasing this exposure.

Fund managers are hunting for assets whose performance may not synch with broader markets, which can offer a hedge against inflation, or which — with the right timing — can lock in for Europe’s future retirees a share of the wealth being generated by emerging markets.

And though they worry about sovereign debt, the need to pay out keeps them exposed to government bonds.

“The challenge is key-risk management and true diversification,” said Lars Rohde CEO of Denmark’s labor market fund ATP with assets of 609 billion Danish crowns ($111.8 billion).

“There is no trick, no easy way. A lot of ‘truths’ traditionally taken for granted … have come to be challenged.”

The market nadir in the wake of Lehman Brothers’ collapse came in March 2009, when the MSCI world equity index was down 51 percent. It has now almost regained that lost ground, and the Citigroup government bonds index is now above pre-Lehman levels.

Heavy losses suffered in the thick of the crisis are also encouraging investment strategies aimed at being able to match liabilities when these arise, as funds budget for members claiming for longer than previously expected.

Life expectancy at age 65 in Europe ranges from about 14 to nearly 22 years, according to Eurostat: an increase of up to three years since 1990. Seen another way, Europe’s population is aging at a rate of roughly two days per week, according to the Berlin Institute for Population and Development.

While UK funds are insuring part of their pensioners’ liabilities with specialists, continental European schemes are adding billions to their current liabilities to prepare for the long-term effect of longevity improvements.

Britain, the Netherlands and Switzerland are the major markets where pensions are mainly funded by a pool of investments, rather than being levies on current workers.

Together with funds based in France, Germany and Ireland they hold the strings to an aggregate $4 trillion purse, according to a study by consultant Towers Watson. That excludes Scandinavia, which also has large and sophisticated pension and buffer funds.

In terms of equity, most are shifting part of their investments into emerging markets to tap into growing economies — making these countries a target of diversification. This shift, while limited in size, makes future pension payments in the West partially dependent on Eastern and emerging economies.

REACHING OUT FOR TIMBER

Denmark’s ATP is “reaching out for” infrastructure, timberland and private equity to expand its investment horizons, Rohde said.

RAFP, the 8.2 billion euro ($10.9 billion) pension fund for French civil servants, is currently boosting its exposure to equity from the current 15 percent to the maximum target of 25 percent of its flows, said its director Philippe Desfosses.

And ABP, the largest pension fund in Europe covering the Dutch civil service and public employees, signaled earlier this year a change in its strategic portfolio to provide “a better picture of the trend over time of the real liabilities.”

Under the new strategy the fund, which has over 200 billion euros in assets, will cut its exposure to developed markets’ equity to increase exposure to emerging markets, commodities, infrastructure and real estate as well as inflation-linked bonds.

Assets which can hold value in an inflationary environment — including derivatives — are also in pension schemes’ sights. Demand for alternative asset classes that may offer a return no matter what is a clear trend, said the Towers Watson report.

ABP has already pushed the boundaries there, investing 500 million euros in music rights.

Schemes sponsored by food group Nestle have been busy implementing new strategies to contain the damage caused by bear-runs in the markets, according to Jean-Pierre Steiner, the executive responsible for Nestle pension assets globally, over 25 billion Swiss francs ($23.63 billion).

“We have some tactical bets in favor of emerging equities that we actually think of reversing because it (the rally) may be over now for the shorter term,” he said.

In that contrarian vein, some Nestle schemes have recently looked at convertible bonds, but Steiner has drawn the line at microfinance. “Our conclusion was it was not worth it at this point in time,” Steiner said.

He is also not persuaded that alternative asset classes such as music rights can prove resilient to market tides.

“We sometimes talk about going into art collections and/or wine but it has not yet gone beyond a joke. I do not think it is a bad idea though, but the mere idea is not easy to sell to trustees or investment committees,” he said.

“In a crisis, inter-asset-class correlations go up and you do not have much diversification left. It is difficult to anticipate but it is logical: when people sell at any cost everything they can, this creates distortions,” he said.

“I am not sure there is much we can do beyond going into very, very different asset classes. But can you really put a lot of money in such new asset classes? Probably not, they would likely remain marginal.”

ALL SEEN BEFORE

However innovative pension funds aim to be, they cannot lose sight of their long-term liabilities and the ensuing dependence on long-term sovereign bonds to meet these, at least in part. Some, looking at the debt burdens of both the United States and Europe, are nervous.

“The amount of public debt and other structural imbalances are a genuine concern in many countries including the U.S.,” said Eric Valtonen, chief investment officer at Swedish third buffer fund AP3.

These worries have been highlighted by Greece’s spiraling public debt and its struggles to regain financial discipline. But pension funds point out that when it comes to meeting retirees’ cash needs, they don’t have a great deal of choice.

“There is no alternative in a global perspective,” said ATP’s Rohde. “Nobody is twisting our arms (to buy sovereign bonds) but it has always been the case.”

He noted that in the 1960s to 1980s, high inflation in Denmark had government bonds there yielding about 20 percent.

“So we’ve seen all this before. We have seen high-yield countries becoming low-yield and vice versa. There’s no real news here.”

ATP currently has no exposure to Greek sovereign debt because the country is a “non-core” investment zone, together with others in southern Europe, he said. But potential high yields on offer could be a draw.

“Of course the present level of interest rates for non-core countries is making them interesting things to go into,” Rohde said.

(Editing by Sara Ledwith)

Europe’s policymakers hope workers his age and younger can serve as models for the citizens of an aging society.

In Paris, 63-year-old Carole Avayou would like to join that group. A technician with Air France-KLM since 1978, she had just turned 60 when she was served notice of compulsory retirement. She has taken her fight for work to court, after a vain protest including locking herself in the office.

“(I wanted them) to discuss things with me, hear my arguments. I put a piece of furniture behind the door and jammed the handle,” she said by telephone.

These two stories show the contradictory realities facing older people in Europe as the continent hits a demographic milestone. This year, the number of people aged 60-65 will start to exceed the 15-20 year olds who traditionally replaced them in the labor force, according to a Eurostat data cited by Allianz.

If Europe’s economies are to grow, older people will have to work for longer. But in a weak economic climate, not many employers want them.

DEMOGRAPHIC DEFICIT

A demographic cliche about China is that it will get old before it gets rich. The risk for Europe is from its richest generation, the ones who as young adults may have smoked Gitanes or sung “I hope I die before I get old” with The Who.

Having saddled their countries with debts, there’s a strong chance they will lack the wherewithal to fund the “silver” consumer lifestyle typified by America’s high-profile retirees. Instead, they risk forming an aging, stagnating bloc which further cripples its economies with the burden of their care.

“We are running into a serious financial problem combined with an aging and — in countries like Germany — a shrinking society,” said Reiner Klingholz, director of the Berlin Institute for Population and Development.

“It will be very difficult, probably impossible, to generate overall growth.”

Europe is the world’s fastest aging major region. If it is to avert a future of decline and generational strife, economists say the only thing the old continent can do is adapt — radically.

Klingholz and others argue that if Europe can face up to and resolve its demographic deficit first, the region may be well placed to capitalize on its experience as countries like China and South Korea run with only a short timelag toward their own, far more rapid, phase of population aging.

China’s rise is driven by a population boom which preceded Mao’s one-child policy, but that has also created a major labor-force gap that’s now only a few years away.

“China will be in deep trouble in 15 to 25 years,” said Klingholz.

But how on earth is old Europe, with its 8 trillion euros of debt, industrial age attitudes and dyed-in-the-wool labor structures, to reach this brave new world?

This article looks at the problems.

POLITICS AS USUAL

What may surprise Europeans is the fact that, at least in some countries, the demographic deficit is not a new issue.

Consider these comments from a report by a British government taskforce which examined the shape of the workforce in the context of a fast-aging society.

“We face a need for quite radical changes in long- established attitudes toward the older worker and retirement,” the report said. “The change in structure of the population requires a similar change in structure of the working population.”

That report was dated September 11th, 1953.

At that time, Britain found the solution to its labor force needs in married women working part-time and a wave of immigrants who, particularly in the 1960s, fueled the post-war growth that helped fund today’s pensions.

“Sometimes I feel as if I’ve been going round and round and round this,” said Bernard Casey, an economist and public policy analyst at the Institute for Employment Research at Warwick University, who has been working on age and employment for the last 30 years, in the UK, in Germany and for the OECD.

Even in Britain, which researchers have found to be relatively accommodating of older workers who are more often unable to afford inactivity, Casey’s experience points to a lack of strong political will to persuade employers to keep older workers, who are typically expensive, in employment.

He notes even Britain’s government suggested early retirement as a cost-cutting solution in a major 2004 review.

He also recalls how Norbert Bluem, a former German minister for labor and social affairs, steered an early retirement law through parliament in 1984 and appealed to older workers to take advantage of the opportunities “in the interests of the unemployed and of younger people.”

A few days later, this time in his social affairs role, he was appealing to Germans to work longer “in order to protect the long-term sustainability of the public pension system.”

“It is the contradiction between the short and the long term which is what we spend all our time worrying about,” Casey said.

One might expect that as the proportion of employers facing a labor shortage increases, and more older people realize they need to keep working to build up an adequate pension, the issue would climb up the political agenda.

Voter turnout of the over-50s exceeded that of the under-50s in Europe in 2005, by between 1.02 to one in Norway and 1.41 in Portugal, according to a study published last year by the World Economic Forum.

The over-50s are already in the majority in Finland and Switzerland, the report said, and will be in France and Germany in 2015. The United Kingdom, where over-50s will make up the majority in 2040, will be last in the voter-aging wave.

“If on the one hand, you are expected to work longer but on the other you don’t have the chance to, I think there will be an increasing mood of dissatisfaction,” said Michaela Grimm, senior economist at Allianz. “The pressure will rise.”

Casey is skeptical.

“Governments feel much more vulnerable about young people than they do about old people,” he said. Youth unemployment in Europe at around 20 percent in the wake of the financial crisis is a more pressing political burden.

EFFORTS SO FAR

Part of the problem might stem from different perceptions of age. Where in some industries, the phrase “too old to work at 40″ can still resonate, when politicians deal with “old” people they tend to address the concerns of the elderly.

People like the shop worker Robinson, who took up his current job after retiring from a mobile home company at 68, do exemplify moves toward the goal of retaining older people in the workforce.

“I was quite convinced I wasn’t going to retire and sit behind the curtains watching the world go by — people who do that don’t seem to last very long,” said Robinson, who works around four mornings a week in a home improvements store.

The European Commission has targeted a 50 percent employment rate for older workers by 2010, up from 45 percent in 2007. That average conceals very wide variations across the region, from around 13 percent in Hungary to 63 percent in Sweden, according to Allianz.

The participation of older workers has increased in recent years — particularly in part-time jobs for men like Robinson, whose employer, retail chain B&Q, has for decades made a public point of its enthusiasm for older staff.

But even though Robinson is not the company’s oldest employee — 95-year old Sydney Prior works one morning a week — only 28 percent of its employees are aged over 50, which as a proportion is short of their increasing number in society.

“The recent recession has in no way affected or changed our employment or retirement policies when it comes to older workers,” said Leon Foster-Hill, B&Q’s Diversity Adviser.

CONFLICT OF INTEREST

But one important difference between Robinson and the former Air France employee Avayou points to a harsh contrast between today’s older workers and those of tomorrow.

“The reason I’m in is not monetary,” said Robinson, whose work supplements what he calls a reasonable state pension, plus small funds accrued in his former job.

Avayou, by contrast, is getting by on half her former income: she is unemployed but unsure if she is entitled to a pension. Her story illustrates how the economic crisis could even exacerbate Europe’s demographic deficit.

In what seems to be an consequence of clumsy legislation, she believes she is the victim of a new rule allowing people to work until 70 that takes effect in France this year. She says it sparked a drive by her employer to force a spate of workers into early retirement before it took effect.

Employers and policymakers do not always have shared interests.

“Allegedly, you can work until the age of 70. You could even raise the retirement age to 80. But as soon as you understand that the bosses can do whatever they like, it doesn’t mean a thing,” she said.

Air France-KLM declined to comment.

A draft government bill aimed at encouraging people to work for longer is due to be ready by September, after negotiations with unions and employers. But rather than go on paying the typically higher salaries of older workers, French unions say several companies have chosen to push employees into retirement.

“There’s a system of financial incentives for companies to get rid of employees who are likely to be older and who, in their eyes, cost the companies too much,” said Alain Parent, representative of national union SNTR-CGT, which represents technicians in radio and television.

“It’s quite common, most companies nowadays are pursuing this policy of saying ‘voila, we will put in place financial incentives around a departure plan for employees who have paid all their annuities … and are a minimum of 60 years of age.’”

RETURN OF EARLY RETIREMENT?

It’s a phenomenon that may go beyond France. Where Europe has been making progress in putting a stop to early retirement — Greece has pledged to eliminate it as part of pension reforms aimed at curbing its budget deficit — companies facing the need to cut costs may well find it hard to see another way.

A survey last year of more than 5,000 companies in eight European countries found most employers needing to cut costs would, as first choice, let older workers go.

“In most countries, 56 to 70 percent of employers would be in favor or strongly in favor of achieving a reduction of staff levels by early retirement of older workers,” said professor Kene Henkens, who coordinated the survey, conducted by Activating Senior Potential in Europe (ASPA) and analyzed by The Netherlands Interdisciplinary Demographic Institute (NIDI).

British charity Age UK in February said over 100,000 people had been forced to retire on or after turning 65 in the recession.

So where the standard demographic story is that in future, there will not be enough young people to carry the burden of care for older people, the risk now is there may not be a chance for older people to help take care of themselves.

“They don’t push them out the door,” said Parent, the union official. “But they persuade the person that ‘it must be hard for you to work at your age, you must be tired, it’s not the same energy, the same desire (to work), so it’d be good to take up this offer and go.’”

THE INCOME GAP

Government efforts to encourage older people to stay in work pre-date the economic crisis. But the debts which accelerated as countries bailed out banks and borrowed economic stimulus have thrown into focus a widening gap between the age people tend to quit work, and the year they can expect a pension.

Seeking to cap deficits by reforming pensions, including deferring pensionable ages, has been a trend in Europe since the 1990s and further steps may be needed beyond Greece and Spain, which were slower to join the wave of reforms.

In Britain, where the state pension age is currently planned to be pushed back to 68 in 2046, consultancy PriceWaterhouseCoopers has argued a further delay — to 70 — would save about 0.6 percent of gross domestic product.

That would have a small “but nonetheless material” impact on the total cost of aging, which the government has put at more than 5 percent of GDP a year by 2060, PWC said in a report.

Against these deferred pension ages is the reality of the workplace. Even though early retirement was declining in the boom ahead of the collapse of Lehman Brothers, there is still a sizeable gap between the ages at which people tend to stop work and their pension year.

In most countries in Europe, employment rates start dropping between 55-59 years old and drop sharply after the age of 60, according to the European Commission. So if Europeans continue to leave the workforce early, they could be looking at a 10-15 year earnings hole before their pension kicks in.

That’s a worry.

“If you ask Germans today what is their biggest concern, it is old-age poverty,” Bundesbank president Axel Weber told a conference in Copenhagen this week.

Data from the European Social Survey show between 25 and 40 percent of people in Western European countries including Britain, France and Germany already say they are “very worried” about income in their old age. Women are especially concerned, and those who are most worried are also more inclined to believe it is the government’s responsibility to provide.

Across the European Union, pensions amounted to just under half the income people earned before retirement in 2008, according to Eurostat. Around 20 percent of elderly people were at risk of poverty in the 27-member bloc.

NO CHOICE

Deferring pension ages is a short-term focus from the crisis — for example, without reforms, Greece’s expenditure on pensions alone is projected by Eurostat to reach nearly one-quarter of its Gross Domestic Product by 2050.

But it would be unwise to confuse it with the structural need to keep Europe’s workers earning into later years.

By 2050, Europe’s population of around 591 million is projected by the United Nations to have shrunk by more than eight percent while the United States and Canada, Latin America and Asia will each have grown by more than 30 percent, and Africa’s will have more than doubled.

Of all the world’s major regions, only Russia — where a poor health system is slowing increases in life expectancy — is set to lose a larger share of its population, according to the Berlin Institute for Population and Development.

Simply put, this means that if Europe’s economies are to grow, they need a combination of increased immigration and higher productivity among their existing populations.

With the proportion of the over-65s heading for 28 percent in Europe by 2050 and life expectancies stretching to 82 from around 76 in 2006, the generation of that increased productivity must be shared by its older members.

“Either you try to be productive — work longer — or you will receive less income when you’re old. There’s no other way,” said Klingholz. “It’s not going to rain euros from the sky.”

WHAT IF…?

Employees forced into retirement who may not have intended to leave — for instance because their children are still at school — face a sharp drop in income, a smaller pension, and could end up needing state help.

“For a company, early retirement seems to be a good idea to cut costs, but in the end more people will be claiming pensions for longer, so social costs will rise,” said Allianz’s Grimm.

“In the worst case, privately accumulated assets would not be enough to support the individual, which would increase the burden on social welfare.”

People who leave the workforce ahead of pensionable age are unable to pay tax or contribute to pension funds, and in any case, with household debt in excess of 100 percent of GDP in most of Europe’s large economies, are more likely to have debts to pay off than be ready to save extra funds.

“What worries me is we’ve spent the best part of two decades trying to purge early retirement out of the system,” said Casey, alluding to the fundamental need to keep as many people in the labor force as possible. “Along comes the crisis and all the good work of the last two decades is undone.

“I worry that we’re threatening to return to the early-retirement culture. We might have early retirement, but it will be less well compensated. That has implications in the short term for people’s wellbeing, and for their future income.”

Large-scale early retirement would pull the rug out from people who need to keep working. Those who in their more senior years in any case expect to sell assets to pay for their care may be forced to cash in earlier, further depressing economies.

And given circumstantial evidence that older people who are inactive tend to become more frequently ill, it may add to the strains on health systems.

“We will never kick-start the economy by depriving a maximum of people of income while there is so much unemployment,” said Avayou, the former Air France-KLM employee.

“And even when you want to keep your job, you’re not able to. It’s disgusted me, the justice system, the politicians. They’re taking the piss out of us.”

(Additional reporting by John Acher in Copenhagen and Scott Barber in London; Editing by Janet McBride)