World Economic Forum warns that pensions are sitting on global time bomb
The World Economic Forum (WEF) has recently warned that the biggest economies in the world are sitting on a pensions time bomb that will balloon to more than $400 trillion in the next four decades unless urgent action is taken, The Telegraph reports.
The WEF saw that the US, UK, Japan, Netherlands, Canada and Australia, which are the six countries with the biggest pensions, as well as the two most populous countries in the world – China and India, are faced with a retirement savings gap of $428 trillion in 2050, compared to the $67 trillion gap in 2015. The gap is expected to grow and reach the equivalent of $300,000 per person by 2050, adjusted for wage inflation, which would be larger than the size of the global economy.
The current UK gap of $8 trillion is expected to reach $33 trillion in 2050, rising by an average of 4pc per year, with the WEF stating that in order for those born today to retire and still be able to receive a comfortable income, a five-point plan is needed.
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One of the main reasons that the pension system is facing pressure is the increasing life expectancy, with babies born today expecting to live for more than 100 years. Moreover, the WEF notes that there will be 2,1 billion people aged over 65 in 2050, which will, in turn, lead to a decrease in the number of workers that pay for the pensions of retirees, from eight today to four per retiree in 2050. This will be added to a context of lower interest rates, weaker returns on investments and slower growth.
“Over the past 10 years, long-term investment returns have been significantly lower than historic averages. Equities have performed between 3pc and 5pc below historic averages and bond returns have typically been around 1pc and 3pc lower. Low rates have grown future liabilities, and at the same time investment returns have been lower than expected and unable to make up the growing pension shortfall. Taken together, these factors have put 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,” stated the WEF.
Due to these predictions, the Office for Budget Responsibility (OBR), the government’s fiscal watchdog, considers that 69 will be the new age of retirement by 2055, with the state pension age in the UK to rise to 66 by 2020, for both men and women. The OBR suggests that the move is critical for the state pensions to remain sustainable.
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