Health and Healthcare Systems

3 challenges to getting the world ready for retirement - and 3 solutions

A pair of elderly couples view the ocean and waves along the beach in La Jolla, California March 8, 2012.  REUTERS/Mike Blake   (UNITED STATES - Tags: ENVIRONMENT SOCIETY TPX IMAGES OF THE DAY) - GM1E8390ALN01

Image: REUTERS/Mike Blake

Daniel Houston
Chairman, President and Chief Executive Officer, Principal Financial Group
Our Impact
What's the World Economic Forum doing to accelerate action on Health and Healthcare Systems?
The Big Picture
Explore and monitor how Ageing and Longevity is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Ageing and Longevity

This article is part of: World Economic Forum Annual Meeting

Given the projection of a global pension asset shortfall of $400 trillion by 2050, I expect to hear a lot about retirement within the broader agenda of sustainable and inclusive economic development at Davos.

The issue reflects a convergence of multiple global factors: ageing populations, longer life expectancies, lower fertility rates, as well as low interest rates. Combined with high levels of government debt and global business competition, it’s clear why responsibility for financial security continues to shift to individuals. Many call this a retirement security crisis. But in my mind, it’s only a crisis if we – governments, employers, providers, asset managers and individuals – fail to come together and act.

But we aren’t starting from square one: the top 20 retirement systems around the world have more than $36 trillion in assets combined. These systems are in various stages of maturity, but we know of certain things that work based on successes and failures around the world. In my view, there are three major global challenges and three potential solutions to financial security for everyone:

The challenges

1. Inadequate income in retirement. With an increase in global life expectancy, there are more years of retirement to fund. Public pension systems alone – which are already under pressure – typically replace just a fraction of what’s needed for a secure retirement. In addition, people simply aren’t saving enough, whether on their own or through voluntary retirement plans in countries where they exist.

2. Lack of coverage. More than half of the world’s workforce is employed informally in what’s often referred to as the gig economy – temporary and part-time workers, contingent labour and independent freelancers. Whether workers take these jobs out of necessity or for the autonomy, variety, and mobility they offer, they’re generally not well covered by the mandatory and/or voluntary retirement systems that are available to the formal sector, even in a more mature market like the US. This report suggests 48% percent of US businesses with 50 to 500 employees, and 76% of those with 10 to 50 employees, offer no retirement plan at all.

3. Sustainability issues. Globally, we’re seeing a dramatic increase in the number of people reaching retirement age. In the US, where the retirement age is about 65, one in five (22%) will be of retirement age or older in 2050 — that’s a 47% increase from 2015. But ageing in the US pales in comparison to Brazil, China, Hong Kong and South Korea, where the percentage of the population that is over 65 is projected to more than double. Declining fertility rates magnify this effect.

Dependency ratios (the number of elderly people per 100 working-age adults) in those countries are projected to at least triple between 2015 and 2050 and more than double in a number of other emerging markets.

Worldwide retirement challenges: Age 65+ as a percent of the population

With fewer workers per retiree, sustainability options are not ideal: pay fewer benefits to retirees, tax the workforce at a higher rate, or some combination of both.

The projected depletion of the US Social Security System’s old-age trust fund illustrates the point. Absent reform, after 2035, revenue from payroll taxes would only be sufficient to pay 77% of benefits to recipients.

The solutions

1) Further pension reform. While the US is one of the world’s more mature retirement markets, it struggles to create a sustainable system that is capable of producing adequate retirement income. It’s not alone. More than half of the countries within one OECD study had initiated reforms to improve financial sustainability and more than half had initiated income adequacy reforms.

Such reforms provide a good roadmap for future policy actions and common-sense fixes, such as higher contribution rates, longer contribution periods, mandatory or otherwise pension schemes to increase coverage, shorter qualifying periods in which to receive benefits, adding voluntary pension systems to complement public systems, improvements in benefits for low-income groups, and required annuitization to ensure a stream of lifetime income.

2) Replicate what’s working. In this 25-country study, five nations (Australia, Denmark, Netherlands, Singapore, and Sweden) were assigned a ‘B’ grade or better for both the adequacy of retirement income for workers and sustainability of that country’s existing system. The common thread: each of these countries have a mandatory, privately-funded programme.

Using tools like tax incentives and matching employer contributions, the US’ voluntary defined contribution (DC) system has also successfully nudged Americans to save for retirement, to the tune of more than $13 trillion between private DC and Individual Retirement Accounts. For context, that’s more than the retirement assets in the next nine largest retirement systems in the world combined.

We must continue to advocate for higher default savings rates and best-in-class design features to automate enrollment, escalate savings appropriately and sweep non-participating employees into a plan.

3) Share the job of teaching people about personal finance. According to this S&P survey, less than half of the adult population was found to be financially literate in 83% of the 143 participating countries. Whatever retirement reforms countries enact, I believe they must be accompanied by educational campaigns supported by governments and the financial services industry.

Here’s the good news: we now have more ways than ever to educate the world through a smart mix of human interaction and intuitive technology – things like virtual coaches and the gamification of personal finance. We just need to focus on two foundational needs: understandable vocabulary and concepts; and tools that support decision-making and removing barriers to action.

Have you read?
The next steps

We have a lot to learn from each other as pension systems evolve market by market, but progress is possible. By sharing the lessons we’ve learned globally while encouraging and inspiring people to save more and save earlier for retirement, we will build a stronger financial future, which will ultimately benefit all of humanity.

Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
Health and Healthcare SystemsJobs and the Future of Work
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

Renovation and reinvention are key to saving our food system. Here's why

Juliana Weltman Glezer

June 13, 2024

About Us



Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum