Longer lifespans and disappointing investment returns will result in a retirement-savings shortfall of $400 trillion in three decades, a figure more than five times the size of the global economy, according to a new World Economic Forum report.
That includes a $224-trillion gap among just six large pension-savings systems: the US, UK, Japan, the Netherlands, Canada and Australia, according to the report issued on Friday. China and India account for the rest.
Employers have been shifting away from pensions and offering defined-contribution plans, a category that includes 401(k) and individual retirement accounts in the United States and makes up more than 50% of global retirement assets. That heaps more risk onto the individuals, who often face a lack of access to the right options as well as the resources to understand them, according to the report.
Stock and bond returns that have trailed historic averages in the past decade have also contributed to the gap.
“We’re really at an inflection point,” Michael Drexler, head of financial and infrastructure systems at the World Economic Forum, said in an interview.
“Pension underfunding is the climate-change moment of social systems in the sense that there is still time to do something about it. But if you don’t, in 20 or 30 years down the line, society will say it’s a huge problem.”
A shortfall of about $400 trillion could be reached by 2050, the Forum said. The figure is derived from the amount of money governments, employers and individuals would need to provide each person with a retirement income equal to 70% of his or her annual earnings before leaving the workforce.
The gap is partially driven by an ageing world population. Life expectancy has risen on average by about a year every five years since the middle of the last century, and half of babies born in the US and Canada in 2007 may live to 104, according to the report. In Japan, the figure is 107 years.
The World Economic Forum said its calculations are based on publicly available data on government programs such as Social Security in the US; employer-based contributions and individual savings. It assumed that workers would retire between the ages of 60 and 70.
Governments can ease the financial burden by increasing the target retirement age. People would also benefit from improved financial education and services.
“A lot of the good solutions already exist somewhere in the world. Just no one has figured them out all together,” Drexler said. “There’s almost no new invention necessary.”
The defined-benefit plans that have fallen out of favour enjoyed advantages including shared risk and an investment manager to oversee allocations, according to the report. And those pension plans often had better collective bargaining power, Drexler said.
Some countries are taking steps. The Netherlands and Canada both have collective retirement systems for defined-contribution plans. That has helped individuals pool risks and reduce fees, the World Economic Forum said.
The group warned that the savings shortfall is growing at a rate of $3 trillion each year in the US alone. It might climb at an annual rate of 7% in China and 10% in India, which have rapidly ageing populations, growing middle classes and a higher percentage of workers in informal sectors.
“What I’m really hoping will happen is that actions will be taken and will be taken now,” said Jacques Goulet, president of health and wealth at Mercer, a consulting firm that collaborated on the report.
“There are three key stakeholders in here. There are governments, companies or employers, and individuals. And frankly the problem here is of such magnitude, that we need the engagement of all three in order to address it. That’s very important.”