ZURICH--(EON: Enhanced Online News)--Leading international think tank of the insurance industry, The Geneva Association, has published a report on the growing pension crisis caused by an ageing population, a drop in fertility and low interest rates in most countries of the world. The Pension Gap Epidemic analyses the scale of the issue, explores possible solutions and suggests eight proposals to address it.
“While longer lives are a tremendous human achievement, their occurrence alongside a widespread and persistent drop in fertility rates and inadequate funding is exerting extreme pressure on an already stressed pension system.”
Low fertility rates have put extreme pressure on the old-age-support ratio—defined as the number of workers divided by the number of retirees. The current worldwide old-age-support ratio is about 6.9 workers to retirees but is expected to drop to approximately 3.7 by 2050. For developed countries, the old-age support ratio is forecast to drop further, reaching 2.0 by the year 2050.2
At the same time, life expectancies at age 60 have been improving dramatically in recent decades. Advances in medical technologies and the health benefits of modern life in developed countries will add an estimated 3 years to the life expectancies of those aged 60 by 2050.3
Increased life expectancies and low fertility rates are the two main drivers of the pension gap. However, limited investment returns—a consequence of the Global Financial Crisis in the form of long-term low interest rates—and chronic underfunding by employers, have also exacerbated pension shortfalls significantly. For example, in the U.S., after years of inadequate financing, the U.S. social security funding gap is currently USD 13.4 trillion according to Moody’s Investor Services.4
The Geneva Association estimates the global pension gap to be USD 41 trillion, requiring a combined effort from governments, corporations and the general population to address this epidemic. Cultures and expectations as well as current legislation and legal systems will need to change as part of these reforms.
Ronald Klein, Director of the Global Ageing research programme at The Geneva Association said, “While longer lives are a tremendous human achievement, their occurrence alongside a widespread and persistent drop in fertility rates and inadequate funding is exerting extreme pressure on an already stressed pension system.” He continued, “There is potential to address the issue but the window of opportunity for reform is closing rapidly As populations in most countries continue to age, the political climate will change with them as they favour policies and governments that keep their existing benefits intact.”
The report concludes that no single stakeholder can address this challenge alone and adequate solutions will require a concerted effort (and perhaps compromise) from governments, corporations and individuals alike. The report therefore suggests eight proposals that governments, corporations and the public can take to reduce the pension gap. It also highlights that the insurance industry is in a uniquely strong position as a private sector agent that can support the mitigation of the effects of this epidemic. It has the expertise through its actuaries and underwriters, the tools with its products and services, the appetite to accept risk and the political influence and means to work with governments and society on practical solutions.
For the report, click here.
For the report summary, click here.
Follow the discussion on Twitter with @TheGenevaAssoc, #PensionGap and #retirement and on our LinkedIn company page.
1 These estimates are based upon a 60 per cent wage replacement ratio, Richard Marin’s pension gap calculation in his book Global Pension Crisis: Unfunded Liabilities and how we can Fill the Gap, and an OECD estimate of pay-as-you-go pension funding.
2 United Nations, Department of Economic and Social Affairs, Population Division (2013). World Population Ageing 2013. ST/ESA/SER.A/348.