Surviving the Global Pension Crisis
No megatrend will define the next 40 years more than the global pension crisis, according to Richard Marin, author of Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap. Marin spoke at the 2014 CFA Institute Financial Analysts Seminar, and his sober assessment of the state of the world’s pension plans should serve as a wake-up call for the some of the world’s biggest economies.
How big is the problem? Marin estimates the global retirement savings shortfall at nearly $100 trillion. In the developed world, unfavorable demographics and an unwillingness on the part of policymakers to make difficult choices are the problem’s key drivers. Aging populations, longer lifespans, and static retirement ages have led Marin to conclude that, without meaningful changes, generational conflict is on the horizon.
Marin estimates global recorded wealth in monetary assets to be $132 trillion, of which roughly $50 trillion is allocated as retirement assets. Looking out to the year 2050, he calculates a current retirement funding need of $98.6 trillion. To drive home his view that few will be insulated from the looming crisis, Marin shared that he considered titling his book, You Can’t Build Your Walls High Enough. Higher taxes, he warned, are almost certainly going to be part of any solution.
Marin’s demographic argument relies heavily on old-age dependency ratios, the number of people over age 65 versus the size of the labor force. With post-retirement life expectancies on the rise and birth rates slowing, nearly all developed countries will see this ratio rise sharply by 2050, resulting in fewer workers supporting more retirees. With pension obligations already at unsustainably high levels in many countries, it’s no wonder Marin called this a “defining moment for our species.”
To illustrate the magnitude of the problem, Marin compared countries’ pension liabilities with GDP and found Germany and France — the “pillars of the EU” — and Japan to be in particularly bad shape, with pension liabilities well in excess of annual GDP. The United States, whose pension troubles have been well-chronicled, is in comparatively good condition, with unfunded pension liabilities at roughly 50% of GDP (including Social Security). But Marin was quick to cite Boston University economist Laurence Kotlikoff, whose paper “Game Over: Simulating Unsustainable Fiscal Policy” projects a 35% chance that in 30 years, the US government’s obligations to its seniors will exceed 100% of everyone else’s earnings. Ominously, Kotlikoff refers to this predicament as “game over.” According to Marin, emerging economy countries do not share the dire pension outlook of the developed world, in large part because of their stronger growth prospects.
Marin was not all doom and gloom. A self-described optimist, he says the pension crisis is not without a solution. But any meaningful reform will require some hard political choices. Higher taxes seem to be inevitable. Retirement ages will also need to be raised, and we will likely see more and more privatizations (which are already under way in Greece). Also, Marin expects defined benefit plans will continue to be phased out, and investors will become more aggressive by taking on more risk. With enough time and the right measures, we may survive the crisis.
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