Individuals must work longer, save more or spend less in retirement to avoid a global pensions crisis, a report by a Group of Thirty (G30) working group says.
The G30 working group on pension funds report - Fixing the Pensions Crisis: Ensuring Lifetime Financial Security - highlighted the challenges of a fundamentally changed environment - a combination of rising life expectancy and decreasing birth rates in recent decades, slower economic growth, and much diminished expected returns on pension fund investments.
It also identified a brewing crisis in pensions across a range of countries, with projected resources falling far short of promised retirement benefits.
The report also presents the policy choices that have to be addressed so that people can be assured of adequate lifetime financial security - such that they can meet essential living expenses and maintain the standards of living they expect in their retirement years.
It estimated the gap between expected lifetime financial security benefits and what existing systems can likely provide to be $15.8trn (£12.3trn) by the year 2050 for the 21 countries analyzed (comprising 90% and 60% of world GDP and population respectively).
It said this lifetime financial security gap would in fact be even larger if less optimistic assumptions for economic growth, wages, and rates of return on pension investments are made.
The G30 report highlighted the basic problem - people cannot save the same amounts during their working years as they do currently, retire at the same age, and still receive the same retirement payouts as today, unless they or future generations pay additional taxes. It said countries must hence employ some combination of the following policies to address the gap in a fair and sustainable manner:
- Increase the retirement age and strengthen employer responsibility for employing older workers and enhancing their productivity;
- Increase private savings and/or taxation to support public pensions; and
- Re-calibrate income replacement rates in retirement, while protecting replacement rates for the poor.
G30 Working Group on Pension Funds chairman Lord Adair Turner - who chaired the UK Pensions Commission - said: "Countries across the globe face a mounting challenge: how to offer adequate financial security for retirees, today and sustainably into the future. If public policies and individual behaviours do not change, many countries' pension systems will face a severe crisis, threatening either unaffordable public expenditure pressures or inadequate incomes for retirees.
He added: "Workers and retirees are living longer today. We need to make crucial adjustments to ensure lifetime financial security for retirees, both now and in the future.
"At the minimum, we recommend countries gradually raise retirement ages in line with the proportional principle, in order to keep stable the proportions of adult life spent in work and in retirement."
Forecasted statutory retirement age by country
Source: PwC analysis; "OECD Pensions at a Glance"; Australian Department of Human Services; Singaporean Ministry of Manpower; European Commission's 2009 Ageing Report
PwC pensions partner Paul Kitson commented: "The report makes clear that absent a change in global pensions and retirement policy and systems, by 2050 there could be a gap between the requirements of the worlds' then pensioners and the pensions systems in place to support them of over US$15trillion. That is equivalent to 23% of global GDP.
"The report also makes clear that any single policy intervention is unlikely to be enough, with a balance of changes likely required, including increasing retirement age, incentivising and increasing retirement savings, and accepting a potentially lower level of income in retirement."
"The increasing burden of global pensions systems has been with us for some time, as life expectancy has increased and fertility rates have fallen. Up until around the global financial crisis, growth in GDP had been enough to overcome, at least partially, this drag. However, in the 'new normal' post global financial crisis world and the expected continuation of lower GDP growth, the drag from retirement systems absent change paints a bleak feature."
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