IMF Urges Millennials to Prepare for ‘Pension Shock’

Young workers in advanced economies won’t be able to rely on pension funds like their parents or grandparents have, and will have to work longer and save more than previous generations, according to the International Monetary Fund (IMF).

The IMF said the so-called Millennial generation needs to take action now to make sure they will have enough money to make it through a retirement that could last as long as 30 years.

“Public pensions have played a crucial role in ensuring retirement income security over the past few decades,” said Mauricio Soto, a senior economist in the IMF’s Fiscal Affairs Department. “But for the millennial generation coming of working age now, the prospect is that public pensions won’t provide as large a safety net as they did to earlier generations,” he said, adding that “as a result, millennials should take steps to supplement their retirement income.”

The IMF cited statistics from the Organization for Economic Co-operation and Development (OECD) showing that pensions, and other types of public transfers, have accounted for more than 60% of retirees’ income in OECD-member countries.

“Pensions also reduce poverty,” said Soto. “Without them, poverty rates among those over 65 also would be much higher in advanced economies.” 

However, the IMF pointed out that despite the benefits pensions provide, they are also expensive to maintain. According to the IMF, government spending on pensions has been increasing in advanced economies, more than doubling from an average of 4% of GDP in 1970, to close to 9% in 2015.

“Population aging puts pressure on pension systems by increasing the ratio of elderly beneficiaries to younger workers, who typically contribute to funding these benefits,” said Soto. “The pressure on retirement systems is exacerbated by increasing longevity—life expectancy at age 65 is projected to increase by about one year a decade.” 

To deal with the rising costs of maintaining pension funds, many countries and companies have initiated pension reforms, which the IMF said has been aimed primarily at limiting growth in the number of pensioners, while reducing the size of pensions. The number of pensioners is often kept in check by increasing qualifying retirement ages or tightening eligibility rules, and minimizing pension size is usually achieved by adjusting benefit formulas.

The IMF said that since the 1980s, public pension expenditure per elderly person as a percent of income per capita—the so-called economic replacement rate—has been about 35%. And that replacement rate is projected to decline to less than 20% by 2060, according to the IMF.
“This means that younger generations will have to work longer and save more for retirement to achieve replacement rates similar to those of today’s retirees,” said Soto.

To close this gap in the economic replacement rate, the IMF said one option for younger individuals is to lengthen their productive work lives. It said that for workers who will start to retire in 2055, increasing retirement ages by five years would close half of the gap relative to today’s retirees.  

“The good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later,” said Soto. “But they must start now.”