May 26, 2017
Pattie Lovett-Reid: We’ll live to 100 – but can we afford it?
Global pensions are a ticking time bomb as the funding gap is set to dwarf world GDP. This is the headline finding of a new study by the World Economic Forum. The world’s six largest pension saving systems – the U.S., U.K., Japan, Netherlands, Canada and Australia – are expected to see a US$224 trillion gap by 2050. The gap in large part driven by longer lifespans and reduced levels of savings.
According to Michael Drexler, the author of the report released Friday, “the anticipated increase in longevity and resulting aging populations is the financial equivalent of climate change.” He went on to say that “we must address it now or accept that it adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”
The gap we are talking about is massive. In the U.S., there is a current shortfall of US$28 trillion and is projected to rise to US$137 trillion in 2050. The average gap in the six markets combined is calculated to reach $300,000 per person. The savings gap looks at all sources of retirement income with a retirement income equal to 70 per cent of their pre-retirement income. For low income earners, the 70 per cent will not be sufficient and could result in poverty unless savings are increased.
Here are a few recommendations from the report:
1. Review the normal retirement age to increase in line with life expectations. For countries like Canada where future generations have a life expectancy of over 100, a real retirement age should become the norm at age 70 by 2050
2. Make saving easy for everyone. Recent reform in the U.K. has eight per cent of earnings automatically contributed to pension savings accounts for each individual starting in 2019.
3. Support financial literacy efforts. Start in schools and target vulnerable groups. Financial literacy educations should be offered throughout people’s careers to raise awareness of the importance of saving.
4. Provide clear communication on what each pillar of the national pension system and the benefits provided. Everyone should have a very clear idea of the level of income they can expect from the government.
5. Standardize pension data. This will help individuals get a full picture of their financial position and a holistic view of their different pension savings accounts.
