The good news: We are all living longer due to advances in healthcare and standards of living.
The bad news: The World Economic Forum (WEF) estimates that the six largest pension systems in the world (U.S., U.K, Japan, Netherlands, Canada, and Australia) will have a deficit of $224 trillion by the end of 2050. Including China and India, that gap rises rapidly to $400 trillion, which is about 1.5 times the annual GDP of these countries combined. About 75% of the current gap ($75 trillion) is associated with underfunded, government-provided programs.
The WEF addressed this situation in a report entitled, “We’ll Live to 100 – How Can We Afford It?”, released in May 2017. It reviews how governments can confront this gap. As the report cites, most pension systems were designed to provide benefits to the typical retiree for 10-15 years. Given the expansion in projected mortality to over 100 years of age (for a child born since 1997), the strain on current systems will be immense if the time spent in retirement expands to 35-40 years.
The report’s most obvious recommendation is that people will have to work longer, and the expected retirement age of 60-65 years will become “a thing of the past or a privilege of the very wealthy.” As a result, the report states that it is incumbent upon governments to encourage the labor market to provide opportunities for older workers, thereby shortening the time in retirement.
The WEF also stresses that global pension systems need to be redesigned to be affordable and sustainable, while creating confidence that promised benefits will be met. Beyond addressing the strains on the labor and tax systems, why is this important? An increasingly sizable retiree population without confidence will curtail spending, leading to global economic contraction.
Additionally, the WEF encourages defined benefit plans to 1.) re-align benefit projections to future investment returns that are closer to the 3-5% per year level, and 2.) address high costs that are eroding investment growth.
Besides proposed changes to defined benefit pension systems, the WEF paper also reviewed issues associated with defined contribution plans, such as improving financial literacy and savings rates. Two of their recommendations that will be controversial: to design systems that automatically increase individual savings contributions based on purchases made, and to provide government and/or employer pension payments to those that step out of the workforce to care for children or the elderly, so that they are not disadvantaged.