The ratio of people in the workforce to those in retirement will fall from 8:1 to 4:1 by 2050 if retirement ages do not change, and the global economy will not be able to bear the burden, the World Economic Forum (WEF) has said
Life expectancy has been growing globally by an average of one year every five years since the middle of the last century, and a baby born in 2017 can expect to live to over 100, the WEF said in a report (PDF) on the implications of this change on pensions and retirement.
Someone who retires today in Japan at the age of 60 can expect to live for over 45 years, spending 20 per cent to 25 per cent more time in retirement than in the workforce, the WEF report said. Retirement systems that were designed to support a retirement of 10-15 years will have to change to prepare for this "seismic shift", it said.
The challenge can be reduced if increases in life expectancy are matched by corresponding increases in the retirement age, but so far "we have seen only gradual steps to increase retirement age. In some countries, the retirement age is falling", the report said.
There is also a growing "savings gap" or shortfall in saving for pensions, the WEF said. The gap in the UK is estimated to have been $8 trillion in 2015 and is expected to grow to $33 trillion by 2050 unless measures are taken to increase saving, the report said.
Worldwide the gap was estimated to be $70tr in 2015 and is likely to grow to $400 trillion by 2050, the report said. Lack of easy access to pensions, a long-term, low-growth environment, low financial literacy and inadequate savings are all putting strain on retirement systems, the WEF said. Individuals are expected to take responsibility for and manage their own savings, but the information they are given does not make this easy, it said.
Policymakers must therefore ensure a "safety net" is provided for all workers, while improving access to well-managed, cost-effective retirement plans and encouraging increased contributions to these. Policymakers must also consider how to create a functioning labour market for older workers and employers must help workers to reskill and adapt their work styles. The number of individuals working past age 65 has more than doubled since 1995, the report said.
A retirement system has to be well designed, the WEF said, to be both affordable for today's workers and sustainable for future generations. If the public has confidence in the system then people will continue to consume and spend during both their working and retirement years. "If this hard-earned confidence is lost, there is a significant risk that retirees will moderate their spending habits and consumption patterns. Such moderation would have a negative impact on the overall economy, particularly in countries where the size of the retired population continues to grow," the report said.
An independent review commissioned by the UK government said in March that the state pension age (SPA) may have to rise to 68 earlier than planned if it is to remain affordable. The 'triple lock', which guarantees future increases to the state pension rate, should also be withdrawn by the next parliament and replaced by a new system of uprating which is linked to earnings, businessman Sir John Cridland said in his report.
According to Cridland, the SPA should increase to 68 between 2037 and 2039, although "means-tested" support could be provided one year before retirement age to those unable to work due to ill health or caring responsibilities.
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com said: "Raising the state pension age increases the need for people to make additional pension provision. In the UK this is being addressed through auto-enrolment, but there needs to be a sizeable increase in contributions to ensure that retirees can enjoy a comfortable retirement. Whether this is driven by compulsion, tax incentives or financial education remains to be seen."
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