The eight largest pension systems in the world will have a combined shortfall of $400 trillion by 2050, which is “setting the industrialized world up for the biggest pension crisis in history,” according to a white paper from the World Economic Forum.
“The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change,” said Michael Drexler, head of financial and infrastructure systems at the World Economic Forum. “We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”
The white paper, titled “We’ll Live to 100 – How Can We Afford It?” calculates the impact of aging populations on the pension gap in the world’s largest pension markets: the US, UK, Japan, the Netherlands, Canada, Australia, China, and India. The US, which has the largest gap among those countries, currently has a $28 trillion shortfall that the World Economic Forum projects will grow to $137 trillion by 2050. The average gap in those countries, excluding China and India, is projected to reach $300,000 per person.
The white paper suggests five ways governments can adapt pension systems to address the shortfall:
- Increase Retirement Age In Line With Life Expectancies – For countries with the highest life expectancies, such as the US, UK, Canada, and Japan, a real retirement age of at least 70 should become standard by 2050.
- Make Saving Easier – The white paper recommends reforms such as in the UK, where 8% of earnings will be automatically contributed to pension savings accounts for each individual beginning in 2019. This creates $2.5 billion in additional pension savings each year, according to the World Economic Forum.
- Support Financial Literacy Efforts – Financial literacy education should be offered throughout people’s careers to raise awareness of the importance of saving. The paper cited a media campaign in Singapore for the launch of a national annuity plan that focused on making financial information more easily understood by the average person.
- Communicate the Objective of Pensions and the Benefits Provided – This would inform people on the level of income they can expect from government and mandatory occupational systems, and whether they need to accumulate their own individual savings to supplement that income.
- Aggregate and Standardize Pension Data – The paper cited Denmark as an example where an online dashboard collates pension information to provide individuals with a complete view of their different pension savings accounts.
“The retirement savings challenge is at crisis point and the time to act is now,” said Jacques Goulet, president of retirement, health, and benefits for consulting firm Mercer, which was the lead collaborator for the white paper. “There is no one silver bullet solution to solve the retirement gap. Individuals need to increase their personal savings and financial literacy, while the private sector and governments should provide programs to support them.”
Tags: Australia, Canada, China, Drexler, India, Japan, life expectancy, Netherlands, UK, US, World Economic Forum