The global economy cannot bear the burden of rising life expectancies unless the structure of global retirement systems changes, according to a paper from the World Economic Forum.
According to the paper, “We'll Live to 100 – How Can We Afford It?” 50% of people born in 2007 globally will still be alive at age 103, and the current stricture of retirement systems will neither be sustainable nor affordable.
The paper lists five factors that are putting additional strains on global retirement systems: A lack of easy access to pensions, a long-term low-growth investment return environment, low levels of financial literacy, inadequate savings rates and the high degree of individual responsibility in managing retirement plans in a world where defined contribution plans dominate.
According to the paper, the population of people at least 65 years old — the traditional age at which people retire — will increase to 2.1 billion in 2050 from 600 million today.
All these factors will result in a gap of $427.8 trillion between the global amount of retirement savings actually saved and needed in 2050, up from $66.9 trillion in 2015. The paper says the gap in the U.S. specifically is growing at $3 trillion every year, “the equivalent of five times the annual U.S. (defense) budget, or 60% of BlackRock (BLK) (the world's largest asset manager) assets under management, which in 2016 stood at $5 trillion.”
The U.S. gap is projected to rise to $136.8 trillion in 2050 from $27.8 trillion in 2015. Other large increases in shortfalls are projected to be China's shortfall, expected to rise to $118.7 trillion from $10.7 trillion and India, projected to rise to $85.4 trillion from $3.5 trillion.
The principles that the paper proposes to address these catastrophic shortfalls includes sharing risks to reduce the burden on individuals such as a collective defined contribution system with pooled investments and longevity risk.
The paper is available on the World Economic Forum's website.