Data and Research

Retirement Policies Need to Change to Address Longer Life Expectancy

Looking at the U.S. specifically, the shortfall of retirement savings needed is growing at a rate of $3 trillion each year, and will reach $137 trillion by 2050, according to the World Economic Forum.

By Rebecca Moore editors@plansponsor.com | May 26, 2017
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Since the middle of the last century, life expectancy has been increasing rapidly, a report from the World Economic Forum notes. On average, it has been increasing by one year, every five years. Babies born today in 2017 can expect to live to older than 100.

To understand the scale of the retirement challenge from increasing life expectancy, the group estimated the size of the shortfall in retirement saving—the retirement savings gap. It also projected these calculations to 2050 to determine how quickly the gap will grow if measures are not taken to increase saving levels.

The calculations assume that for most individuals, their retirement needs will be met by a combination of income from three sources: Government-provided first pillar pension, employer (public or private sector) retirement plans, and individual savings.

The retirement savings gap for 2015 was estimated to be approximately $70 trillion, with the largest shortfall being in the United States ($28 trillion). Looking at the U.S. specifically, the gap is growing at a rate of $3 trillion each year, and will reach $137 trillion by 2050. This increase is the equivalent of five times the annual U.S. defense budget, according to the report.

One obvious implication of living longer is that individuals are going to have to work for a longer time, the report suggests. “The expectation that retirement will start early- to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy,” researchers write.

The report also notes that absent any change to retirement ages, or expected birth rates, the global dependency ratio (the ratio of those in the workforce to those in retirement) will plummet from 8:1 today to 4:1 by 2050.

Another thing affecting the shortfall is that over the past 10 years, long-term investment returns have been significantly lower than historic averages. Equities have performed 3% to 5% below historic averages and bond returns have typically been 1% to 3% lower. This puts an increased strain on pension funds as well as on long-term investors that have commitments to fund and meet the benefits promised to current and future retirees. Individuals have also been impacted and have seen smaller growth in their retirement balances than in the past.           

Further, to support a reasonable level of income in retirement, 10% to 15% of an average annual salary needs to be saved. Today, individual savings rates in most countries are far lower. The report contends this will continue to be a challenge unless the importance of higher savings rates is better understood and communicated.

NEXT: Policy implications

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