Pensions and ageing populations: the problem explained
Ageing populations and longer retirements in much of the developed world are straining pension promises
by: Robin Wigglesworth
The core challenge is that people are living longer. While the dramatic expansion of life expectancies is one of humanity’s accomplishments, what was once only a decade subsisting on savings and pension plans, has often become two or more decades. Here is a chart showing the percentage of people aged 65 or over in various countries and regions.
At the same time, the number of young workers replacing them has atrophied, as birth rates have fallen across most of the developed world in the years since the generational bulge of people born in the aftermath of the second world war.
The outlook isn’t much better. The fertility rate has sagged in most advanced economies over several decades, as people choose to have fewer babies. Although populations can and are being boosted by immigration, on average the fertility rate has dropped well below the 2.1 children mark that is considered the “replacement rate”, given low infant mortality in most developed countries.
Japan’s fertility rate looks particularly low, given the country’s limited immigration. But this will radically transform the age structure of the entire global population in the coming decades, as these bar charts show.
All this makes pension promises and assumptions made when populations were younger, lived shorter and could expect higher financial returns from investments much less durable.
Defined benefit schemes are often underfunded, due to falling bond yields lifting the size of future liabilities, while many people in defined contribution plans are saving too little to ensure themselves a comfortable retirement.
But one of the biggest issues could be in underfunded or entirely unfunded government pension promises, with many countries operating on a pay-as-you-go basis.
Citi earlier this year estimated the value of unfunded or underfunded government pension liabilities for 20 countries in the OECD at $78tn, compared with the official $44tn gross government debt burden.
Many of these challenges are slow-moving, allowing countries time to tackle the issues. But the overall solution will probably be an unappealing mix of working longer, saving more and somewhat less generous retirement payouts.
More from the FT pensions series:
Podcast: The dark future A dramatic decline in bond yields has added to the pressures of longer lifespans and falling birth rates to create a looming social and political pensions crisis. John Authers and Robin Wigglesworth discuss the looming crisis
Pensions: Low yields, high stress In the first article of a series, the Financial Times examines a creeping social and political crisis
Target-dated funds need an overhaul TDFs help pension plans but face challenges of fees, asset allocation and benchmarks
Canada quietly treads radical path on pensions Retirement funds push beyond bonds and stocks in search of better returns
Pensions and bonds: the problem explained Bond mathematics and the scale of pension deficits