Retirement savings deficit will hit $400trn by 2050

The retirement savings deficit across eight countries is expected to grow five percent every year, according to a report by the World Economic Forum

Rising life expectancy and governments' failure to prepare people for longer working lives are among the causes of the widening savings deficit 

A report by the World Economic Forum (WEF) has found the combination of rising life expectancy and falling birth rates will force the total retirement savings deficit across the UK, the US, Australia, Canada, China, India, Japan and the Netherlands to soar to $400trn by 2050.

Since the post-war period of the 1950s, life expectancy in the developed world has increased by about one year every five; babies born in 2017 are expected to live to 100. The study We’ll Live to 100 – How Can We Afford It? found this increase in life expectancy will cause the number of over 65s globally to balloon from 600 million today to 2.1 billion by 2050.

The study determined that, if there is no change in retirement age, the rise in life expectancy combined with falling birth rates will cause the global ratio of working age people to retirees to fall from eight to one today, to four to one in 2050. The current pension system in rich countries would be unsustainable in these circumstances. However, as the WEF pointed out, governments in general have not attempted to adjust people’s expectations to work longer and retire later; Poland, for example, recently lowered the retirement age to 65 for men and 60 for women.

The retirement savings gap is expected to grow by a rate of five percent each year, from around $70trn in 2015, to around $400trn in 2050

Michael Dexler, Head of Financial and Infrastructure Systems at the WEF highlighted the severity of the problem, describing it as “the financial equivalent of climate change” 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,” he said.

The report pointed to a host of other factors exacerbating the looming pensions crisis. Among them: the lack of easy access to pension plans for self employed workers; the 50 percent of workers globally in the informal sector; and the high degree of individual responsibility demanded by the current pension system. Low levels of financial literacy and individuals’ inability to save the 10 to 15 percent of annual salary necessary for a reasonable pension were also highlighted, along with a long term low growth environment delivering lower than average investment returns over the last 10 years.

While the pension problem is particularly pronounced in rich countries with high life expectancies (such as Japan, where life expectancy for children born in 2007 is 107), it is also a risk in developing economies. The funding gap is expected to grow fastest in China and India, at seven and 10 percent respectively, due to a rapidly ageing population, a high percentage of informal workers and a growing middle class.

In total, across all of these countries, the WEF found the retirement savings gap is expected to grow at a rate of five percent each year, from around $70trn in 2015, to around $400trn in 2050; the vast majority of this gap, 75 percent, is made up of expected government contributions to public sector workers.