Longer Life Expectancy Puts Pressure on Global Pension Systems

Even though the COVID-19 pandemic caused millions of premature deaths and wiped out nearly a decade of life-expectancy gains, longevity is projected to return to its previous trend and rise to a global average of 77.3 years by 2050 from 73.4 years in 2023, data from the 2023 Allianz Pension Report shows. 

While the U.S. pension system is rated among the best in the world by the Allianz Pension Index, it remains unclear if the U.S. public pension system is prepared for the demographic shift in the aging population in years to come. 

To assess the progress in preparing pension systems for demographic change, the API was calculated based on three sub-indices—basic conditions, sustainability and adequacy—and took into account 40 parameters, each rated on a scale of 1 to 7, with 1 being the best grade. 

The U.S. received an API average of 2.9, one of the best ratings out of the 75 countries included, tied with Taiwan, Israel and Belgium. Denmark, the Netherlands and Sweden (with a combined average of 2.5 stand at the top of the index, with pension systems that adjust the retirement age to developments in life expectancy and have “strong capital-funded occupational and private pension pillars.” 

In contrast, countries like Lebanon, Sri Lanka and the United Arab Emirates stand at the bottom of the ranking, as Allianz said they face the triple threat of a rapidly aging population, low retirement ages compared to the rest of the world and low coverage of pension systems. 

Raising the Retirement Age 

Some governments have taken pension reform measures, with mixed results in their API ratings. For instance, in France, President Emmanuel Macron recently signed into a law a highly unpopular pension reform, raising the state pension age to 64 from 62.  

In terms of sustainability, France received a less-than-strong score of 3.7. But the report said without the increase in the retirement age, the country’s rankings would have fared worse, with a score of 4.4. 

“The reform catapulted France from rank 61 to 40 in the sustainability rankings,” the report stated. “Not a bad achievement for one single—even if highly controversial—reform.” 

When looking at how countries across the globe scored in each subindex, adequacy (3.4) scored the best, followed by sustainability (3.7) and basic conditions (4.0). The Allianz report said these findings suggest most pension systems place a greater emphasis on the well-being of the current generation of pensioners than on future generations of tax and contribution payers. 

Larry Nisenson, the chief growth officer at Assured Allies, an aging innovation company, said although Americans would likely be unhappy with another increase in the federal retirement age, this reform would have a “positive impact” on the deficit that currently exists in the public pension system in two distinct ways.  

“One, it will keep people in the workforce and contributing to the pension system longer,” Nisenson said in an emailed response. “Two, by keeping people in the workforce longer, they will not dip into their benefits as early, hence adding to the deficit. This won’t have a dramatic impact on solvency, but it certainly is a net positive.” 

Nisenson added that when Social Security was created in 1935, the average American’s life expectancy was 65, while by 2022 it was 77. He said it “shouldn’t come as a surprise” that the U.S. needs to raise the age for full retirement in order to shore up the system and allow more adults to collect their full benefits as they reach 67 years old. He suggests that people retiring earlier than 67 will deplete the amount of money in the system.   

Currently, those who are 66 and eight months can start receiving 100% of their monthly benefit, and the age is rising to 67 for anyone born 1960 or later. Anyone who claims early, starting at age 62, will receive a smaller benefit, and waiting to age 70 will maximize efficiency 

Rising Interest Rates: A Blessing and a Curse for Reforms 

The recent high-inflation environment and rising interest rates helped to close the retirement savings gaps left by the COVID-19 pandemic, but it also increases the pressure to improve the long-term financial sustainability of public pension systems, the Allianz report stated. 

The return of positive interest rates was a “blessing and a curse” for pension reforms. For savers, the rising interest rates helped build up adequate retirement assets via the compound interest effect, but the report said for governments around the world, rising rates increase the need to reform pension systems to make them sustainable. 

“Since they can no longer take on additional debt at virtually no cost, governments have less financial leeway to subsidize state pension systems in deficit,” Allianz stated.  

By the year 2050, Allianz projects that there will be around 1.6 billion people aged 65 and older worldwide—about 1 billion will live in Asia, most of them in China and India; 200 million in Europe; 142 million each in Africa and Latin America; 100 million in North American; and 9 million in Australia and New Zealand.  

Birth rates also play a major role in this demographic shift. In all world regions except Africa, birth rates have fallen below the level of 2.1 necessary to keep a population stable, according to Allianz.  

The Allianz report said it is crucial that pension systems prepare for this demographic change to not overburden future younger generations, but it is also necessary for pension systems to remain adequate to guarantee that the aging population has a decent standard of living in old age.  

“The challenge will be to find the right balance between guaranteeing sustainability and adequacy at the same time,” the report states. 

Allianz’s analysis showed that an “ideal” pension system is within reach if a strong, capital-funded second– pillar retirement system is in place. With the retirement ages in many industrialized countries set to increase, the report stated that it is crucial to integrate older workers into the labor market to prevent a reduction of benefit levels. 

Denmark and the Netherlands, both countries with comparatively high public pension benefit levels, have the most adequate pension systems, according to Allianz.