Agency Predicts ‘$224 Trillion Retirement Gap’ (Seriously)

World Economic Forum makes startling claim

401k, pensions, retirement, deficit, World Economic ForumWEF sees serious retirement storm clouds on the horizon. Is it accurate or alarmist?

Human sacrifice, dogs and cats living together—mass hysteria.

Not to be flip about the World Economic Forum’s prediction of coming retirement funding shortfalls, but the eye-popping $224 trillion deficit by 2050 in the world’s largest pension systems requires a bit of gallows humor.

The obvious inference is that demographic changes in longevity mean defined benefits can no longer get it done, and it makes the case (again) for 401k-style defined contribution plans.

It will imperil “the incomes of future generations and setting the industrialized world up for the biggest pension crisis in history,” the WEF reports warns.

“The anticipated increase in longevity and resulting aging populations is the financial equivalent of climate change,” Michael Drexler, head of Financial and Infrastructure Systems at the World Economic Forum, said in a statement. “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 report is the latest study to calculate the impact of aging populations on the pension gap in the world’s six largest markets, which include the United States, United Kingdom, Japan, Netherlands, Canada and Australia.

The gap is the largest in the U.S., where a current shortfall of $28 trillion is projected to rise to $137 trillion in 2050.

The average gap in the six markets combined is calculated to reach $300,000 per person. The total gap for all eight markets in the study (which further includes China and India, which have the world’s largest populations) will reach a total of $400 trillion by 2050.

The report highlights five high “priority actions” that governments and policy-makers should take to adapt pension systems to address the challenges:

  • Review normal retirement age to increase in line with life expectancies. For countries where future generations have a life expectancy of over 100, such as the U.S., U.K., Canada and Japan, a real retirement age of at least 70 should become the norm by 2050.
  • Make saving easy for everyone. A good example is the recent reforms in the U.K., where 8 percent of earnings will be automatically contributed to pension savings accounts for each individual from 2019. This initiative to automate the act of saving so far has boosted savings for 22- to 29-year-olds and low-income workers, and is estimated to create $2.5 billion in additional pension savings each year.
  • Support financial literacy effort—starting in schools and targeting vulnerable groups. Financial literacy education should be offered throughout people’s careers to raise awareness of the importance of saving. A good case study is the media campaign executed in Singapore for the launch of CPF LIFE, the national annuity scheme that focused on translating a simple message easily understood by the average person.
  • Provide clear communication on the objective of each pillar of national pension systems and the benefits that will be provided. This would give individuals an understanding of the level of income they can expect from government and mandatory occupational systems and whether they need to accumulate their own individual savings to “top-up” income provided from national systems.
  • Aggregate and standardize pension data to give citizens a full picture of their financial position. A good example is Denmark, where an online dashboard collates pension information to provide individuals with a holistic view of their different pension savings accounts.

The report also emphasizes that “governments and policy-makers have a central role to play in reforming pension systems to ensure we can adapt to societies where living to 100 is commonplace.”

“Because retirement outcomes unfold slowly over decades, emerging problems are very hard to see and are virtually unchangeable once they occur,” added Robert Prince, co-chief investment officer of Bridgewater Associates and part of the World Economic Forum’s Retirement Investment Systems Reform Project Steering Committee. “Good outcomes require effective approaches and good decisions applied consistently over decades.”

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