Pension crisis threatens young
The World Economic Forum has warned that future generations will be haunted by the effects of a global pension crisis that is brewing today. The FT's Josephine Cumbo speaks to Michael Drexler, head of financial and infrastructure systems at WEF, about what can be done.
Filmed by Rod Fitzgerald. Produced by Vanessa Kortekaas. Still images by Getty.
Future generations will be haunted by the effects of a global pension crisis that is brewing today. These are the words of the World Economic Forum. Joining me from the forum to discuss this crisis is Michael Drexler, Head of Global Financial Systems. Hello, Michael.
Michael, in a recent report, you warned that the retirement savings gap for six countries, including the UK, could blow out to $220 trillion by 2050 if governments don't act now. Why are you so convinced that the crisis is going to reach that scale?
We're convinced for really three reasons. One of them is we've partnered with Mercer, the only actuarial firm who really have a grip on longevity and actuarial tables, which is very important in this context. And then, of course, the other two reasons are longevity-- people live a lot longer, which is a wonderful thing, and we're projected people-- who are born this year are projected to live up to 100 years when they get older.
And the second thing is we have less and less of a workforce to support pensioners. And so we have now a situation where pension systems were designed for more than 10 workers supporting each pensioner and people having a life expectancy of 10 years after retirement-- we're now looking at 20 to 30 years after retirement and only four people supporting each pensioner.
So those retirement systems are going to come under increasing strain in the future as people live longer. So what are the other factors that will put pressure on retirement systems?
Other factors are that people are not yet aware of the magnitude of this and so individual savings rates are much lower than they should be. The suggestion is people should save 10% to 15% of their annual income for their pension, and in reality, often they save less than 5%. And in addition--
That's a big shortfall.
That's a very big shortfall. And in addition, a lot of the responsibility with defined contribution schemes has been devolved to individuals and they often don't have the tools or the education to really make those very, very long term life changing decisions.
OK, people are being left on their own and shouldering more responsibility to build up those retirement funds and possibly not knowing how much they should save.
So what should governments be doing now to avert this global pension crisis?
So government should do a variety of things. One of them is to make sure that people really have access to pension schemes and that it's well known that they have access and they should encourage people to contribute--
Don't exclude them.
Don't exclude them. Make them aware that they can and should contribute. And where possible, even make those contributions at least the default choice if not mandatory.
And just very briefly, what about the young? I mean, there are difficult extra pressures now as you mentioned about being placed into these risky defined contribution schemes, but they've also got more pressures with debt and having to manage their money on their own. I mean, is there anything that governments could be doing specifically to help younger savers?
Mm-hmm. We think there is at least a couple of things governments could do. The first one is awareness, because, just personally speaking, if I think back to being 25, pensions were not top of my mind and yet they should have been, really, because the earlier you start saving, the better the returns are that you get and the longer the compounding happens.
The other thing is when obviously you can only save when you have spare cash and when there are competing demands on young people's wallets, so to speak, sometimes governments might be able to make a prioritisation and say, you know, first and foremost, Michael, you should contribute to your pension-- if after that money is left to repay student loans, then that's the sequence it should be rather than the other way around.
Quite controversial, no doubt. Very briefly, what are the consequences for future generations if the government does not-- governments and policymakers don't act today?
So one of the clear consequences is poverty in old age and that's very, very undesirable-- you really don't want to be 80 years old and find you're in poverty. With that will come much bigger draws on social security systems and therefore bigger draw on state finances. And so all of you to act now, it's a little bit like you're flying towards a mountain-- you don't quite know high the mountain will be, but the further away from the mountain you start pulling the plane up, the easier it's going to be. And if you wait till you're too close, you're going to either crash or at least stall the plane, and that's what we're trying to avoid and that's why we're raising the alarm right now.