The retirement age in Britain and other leading developed countries will need to rise to 70 by the middle of the century to head off the biggest pension crisis in history, according to the World Economic Forum.
The body that runs the annual gathering of the global elite in Davos said deficits in the world’s six largest pension systems would more than quadruple to $224tn by 2050, unless people worked longer and saved more.
With people born today having a life expectancy of more than 100, the WEF said the cost of providing security in retirement for a rapidly ageing population was the financial equivalent of climate change.
It warned the huge and spiralling cost would imperil the incomes of future generations and set the industrial world up for the biggest pension crisis in history.
The WEF said it had examined the world’s six biggest pension saving systems – the US, the UK, Japan, the Netherlands, Canada and Australia – and found that all were coming under strain from an expected global increase in the numbers over-65s rising from 600 million to 2.1 billion in 2050.
“The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change,” said Michael Drexler, head of financial and infrastructure systems at the WEF. “We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”
Including China and India, which have the world’s largest populations, the combined savings gap for the eight countries reached $400tn by 2050, a sum five times the size of the current global economy.
The report based its estimates of the pension savings gap on the amount of money needed to provide every person with a retirement income equal of 70% of their pre-retirement income. According to the OECD, a target of 70% of pre-retirement income roughly equates to an unchanged standard of living because once people retire they save less and pay less tax.
The WEF said the funding gap would continue to grow at a rate higher than the expected economic growth rate, often 4% to 5% a year, driven in part by the effects of an ageing population: a growing population of retirees who are expected to live longer in retirement.
Although Britain’s retirement age is due to rise to 67 between 2026 and 2028, the WEF said further increases would be needed to forestall a predicted increase in the pension savings’ gap from a current $8tn to $33tn by 2050. Half the children born in 2007 could expect to live until they were 103, putting a strain on the pension system. The pension savings gap in the US is forecast to rise almost fivefold from $28bn to $137bn by the middle of the century.
The report praised the UK for its decision to ensure that 8% of earnings will automatically be saved in a pension for each individual after 2019, noting that auto-enrolment had already boosted saving by 22- to 29-year-olds and low income workers by $2.5bn a year.
“The retirement savings challenge is at crisis point and the time to act is now,” said Jacques Goulet, president of health and wealth at Mercer, a financial services firm that helped the WEF produce the report. “There is no one ‘silver bullet’ solution to solve the retirement gap. Individuals need to increase their personal savings and financial literacy, while the private sector and governments should provide programmes to support them.”