Life expectancy in the industrialized world -- and in much of the developing world too -- is rising at a pace unseen.
Scientists at the
Rapid rises in life expectancy have been accompanied by a decline in the rate at which most women in developed economies are producing children. This has profound implications for economies in general and in particular for pension systems that are financed through taxes on the working population.
As early as 1934, the Swedish economists
The United Nations Population Division in 2012 estimated that today there are roughly 810 million people worldwide over the age of 60 and that by 2050 that number will have more than doubled to 2 billion.
At that point, according to its projections, older people will outnumber children aged up to 14 years for the first time in human history. Just over half of these older people will be concentrated in
Moreover, even among older adults, the fastest growing group are the over-80s. By 2050, the number of centenarians is likely to grow tenfold to 3.2 million. The burden of supporting them with pensions and health care falls on a declining working-age population.
While longer years of life are a blessing, the speed with which this demographic change has occurred is forcing everyone -- from governments to employers to individual workers -- to rethink retirement.
Retirement is largely a late 20th century phenomenon which evolved from the social security systems of the 19th century. Social security was needed because new technologies increasingly rendered the elderly unfit for the labour market.
What is less clear is whether retirement pensions were intended to be universal benefits for all to enjoy or an insurance policy for those few who were at risk of outliving their ability to work. Actuaries at Longevitas, a consultancy specializing in mortality modelling, estimate that the pension age would have to rise to 80 if a 20-year-old starting work today were to have the same chance of drawing a pension as a 20-year-old beginning employment in 1909, when social security first took effect.
In the post-war baby boom, when young adults were plentiful, little thought was given to whether a pension system that depended on taxes paid by workers to those already retired was really sustainable. And beyond the state pension, private sector employers found good reasons to offer additional retirement benefits of their own. Governments offered tax inducements to employers and workers who saved for pensions and these savings pots proved useful when companies wanted to encourage older workers to retire early and make way for younger ones.
The British system of private pensions, with their outsized returns from heavy investments in equities -- roughly 80 per cent of pension assets were in shares in the late 1990s -- was held up as a model for other nations. Even the bursting of the dotcom bubble at the turn of the century caused few to doubt it.
But in recent years something has changed in investment markets, and there is a growing body of evidence suggesting that one driver of that change may be the ageing population. During the bull markets of the 1980s and 1990s baby boomers were earning and saving for retirement, driving up equities prices. Now, they are drawing on those savings and holding their investments in bonds.
'The 1980s and the 1990s have to be regarded as an anomaly,' said
Data from Barclays Equity Gilt Study from 2010, and updated to 2012, shows a clear correlation between the percentage of the British population aged 35 to 54 -- considered a prime age group for pension savings -- and the price/earnings ratios (a guide to the value of the market as a whole) of UK equities.
Nor is the UK market unique. A study in 2011 from the Federal Reserve Board of
Nor are stock markets the only asset class likely to be affected by population shifts.
As people age, risk aversion grows. That encourages investors to pick safe assets such as government bonds. Demand from pensioners drives government bond yields down to levels that look unrealistically low compared with levels in the 1980s and 1990s. And it is not just pensioners who are depressing yields.
In 2005, well before the fiscal crisis, two economists, Professors
There is little evidence that either of these pressures -- the demographic shift dragging down equity returns or the insatiable hunger for safe assets depressing bond yields -- has abated.
Retirement, then, as we have come to think of it, will probably be an event that occurs well beyond age 65 for many, if not most, workers. It will require workers to save more for longer and perhaps to expect a lower standard of living when work stops.
And it will require policymakers to think about how to make their smaller populations of working-age people become more productive. This means ensuring bigger investments in education and training, the introduction of measures to maximize female participation in the workforce, and policies that cut the cost of raising the next generation of taxpayers.
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