One of the biggest failures of modern economics is its inability to adapt to the changing lifespan of humanity. Modern medical technology is increasing the lifespan and reducing illness. Mental competence and physical ability are rising. Today, it is common to find Septuagint’s with capabilities that were once attributed to middle-aged only a century ago. What is troubling more than anything is that the algorithms used to calculate morbidity and mortality for pensions and life insurances hasn’t changed much, and most states also haven’t changed the employment situation to meet the changes? In fact, there is less work due to higher automation, making “overcrowding” a distant worry when compared to the burden of handling a larger percentage of “pensioners” with lower incomes needed to provide normal living conditions.
The UK is a prime example of a country aimed at disaster. The Government Actuary’s Department (GAD) recently stated that the State’s pension fund (national insurance coverage for pensioners) would run out of assets by 2035. Now 2035 is not so far away, in fact, we are talking about 17 years to be exact. Which means; if a solution is not found within the next two or three years, everyone aged 50 today will be without a state pension when they retire, and anyone younger then that must start to worry.
Solutions regarding the problem are incomplete and at the worst downright stupid. Where some suggest raising the taxation to solve the issue without calculating the ever-growing demand due to population growth. Raising taxes will not solve the problem, it will look at the most delay it by a few more years but deplete the income levels of current wage holders as well as force economies to constantly raise the wages to outrun the depletion caused by over taxation.
There is only one solution, a complete restructuring of the socio-economic structure of society. Where factors such as employment, cost of living, medical technology, pensions, and education are all interlinked. The cycle of life is holistic, and so is the economic cycle of life.
As the GAD stated, “If the system is to continue to cover the current form of state pension and other benefits, then either the fund’s income has to rise, or expenditure has to be controlled.” Their mistake is the use of the word “controlled.” There is no need to control the current spending of society; there is a need to change the way society manages its population.
Presently the NIS contributions are being used for benefit payments, annual contributions income and benefit payments reach close to £90billion. Stating this fact is actually irrelevant to the situation. In fact, stating any numbers are irrelevant. The only relevant facts are how to restructure the demographic interaction to education, employment, taxation, and pension.
Another daft solution is constantly raising the age of retirement, which only adds insult to injury and does not solve the problem. Treating the issue of pensions by raising taxes and retirement age is like treating cancer with pain relief pills and changing eating habits after the fact, which will not change the outcome, it will only make the quality of life seem better while the patient dies sooner.
The first time the global pension crisis was mentioned in a global forum, was back in 1998 at the World Health Organization (WHO) Executive Board Conference in Copenhagen, where the delegate from Israel delivered a powerful message on the subject. Since then it gained weight and was researched in full at the World Economic Forum (WEF) which presented their white paper on the subject “We’ll Live to 100 – How Can We Afford It?” on May 2017.
The World Economic Forum (WEF) presented these 5 points, which have been edited here, the original can be seen at their site at https://www.weforum.org/agenda/2017/05/5-things-you-need-to-know-about-the-global-pension-crisis/
1. We live longer than what pension systems were designed for
The retirement age for most of these countries is 65 (with Japan the exception, at age 60).
Looking at life expectancy in 2015, we can see that pensioners are now living eight to 11 years longer – and in the case of Japan, a whopping 16 years longer.
That means that pension systems are now having to pay benefits for two to three times longer than what they were designed for.
The top bar represents the expected increase in life expectancy by 2050.
Source: The World Bank DataBank: Health Nutrition and Population Statistics: Population estimates and projections
2. There is a pension gap between what is needed for retirement and what is saved
It is hard to define adequate income for retirement.
One common premise is that we need less money in retirement than we do while we are working (during wealth accumulation).
We have three main sources of income during retirement: government-sponsored pensions, work or occupational pension plans, and personal savings.
Due to modern life expectancy, there is a gap between what we need during retirement and what we have available, even among countries with developed pension systems.
Image: Mercer Analysis
3. The problem is worse for women
Globally, retirement balances for women are typically 30-40% lower than that of men.
Lower wages account for some of this imbalance, but coupled with longer-life expectancies for women; these smaller balances then need to be stretched over a longer period of time as well.
4. The gap is growing at an alarming rate
This problem is getting worse.
In the chart below, we have illustrated both the gap in 2015 as well as the gap by 2050.
For all countries, this is being driven by continued increases in life expectancy.
For economies that are still developing, the increase in the gap is also being driven by rising wage growth as these countries continue to industrialize. By 2050, the total gap is a predicted to be a staggering sum of $400 trillion – roughly five times the size of the global economy today.
5. We need to act now