A TRILLION HERE AND A TRILLION THERE… World’s Major Economies to Come up $400 Trillion Short on Retirement Savings.
“We’re really at an inflection point,” Michael Drexler, head of financial and infrastructure systems at the World Economic Forum, said in a phone 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 World Economic Forum said. The figure is derived from the amount of money government, employers and individuals would need to provide each person with a retirement income equal to 70 percent of his or her annual earnings before leaving the workforce.
The gap is partially driven by an aging 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 U.S. and Canada in 2007 may live to 104, according to the report. In Japan, the figure is 107 years.
“In the long run, we are all dead” is starting to sound dated.
For what it’s worth, the life expectancy statistics are badly misunderstood. According to the Life Tables for the United States Social Security Area 1900-2100 life expectancy at birth was 47 for men and 49 for women in 1900, while in 2020 life expectancy at birth is 76 for men and 81 for women (Figure 2a). But for the purposes of pensions and Social Security it makes more sense to consider life expectancy at 65. In 1900 life expectancy at 65 was 77 for men and 78 for women, while in 2020 life expectancy at 65 is 81 for men and 85 for women (Figure 2b), and increase of only 4 years for men and 7 years for women in the past 120 years.
All those stories about how Social Security was intentionally designed to kick in after most people had died are pure bunk. Then as now, if you survived all the childhood diseases and lived to be a tax-paying adult, you were likely to claim several years of Social Security benefits.
The problem, at least in the US, is that our spendthrift federal government has borrowed all the money in the Social Security “lockbox” and left IOUs payable by future taxpayers. The Social Security Administration is now cashing in those IOUs.
“The Congressional Budget Office released updated projections of Social Security’s long-term financing, finding an even larger long-term deficit than in the Office’s previous calculations. The new figures, released December 21, find Social Security’s combined retirement and disability trust funds running out in the year 2029, after which benefits would be cut across the board by 29%.”
And those projections are based on the assumption that today’s young workers will happily pay ever higher Social Security and Medicare taxes knowing that by the time they retire they’ll receive a pittance in return.
Ps. Don’t think this is the only looming fiscal problem facing us. Josh Zubrin at the WSJ predicts that by 2021 the cost of interest on the federal debt will match the cost of defense and non-defense discretionary spending and will continue to increase, consuming the lion’s share of all discretionary spending after that.
Note that in his graph Zubrin presents the rosiest possible future, with defense and non-defense discretionary spending remaining level as the cost of interest increases from $350 billion today to $800 billion by 2025. Where does the other $450 billion come from, thin air?
We’re hanging ten off the edge of the fiscal abyss and it may well be too late to step back before we fall. Interesting times we live in…
h/t Swen Swenson