Global projections for 2050 are mind-boggling: 1.6 billion people aged 65 and over and a $400 trillion retirement savings gap. That means a $250,000 shortfall for the average retiree, who will struggle to pay for basic expenses such as housing, food and healthcare.
Our elderly population deserves better than that. Far better.
The good news is that there’s now a consensus among nations that the twin phenomena of rapid ageing and longevity threaten developed and emerging economies alike. There’s equal recognition that due to demographic realities, traditional “pay as you go” retirement schemes can no longer be the sole source of adequate retirement income.
However, governments are increasingly rising to the challenge. Japan, home to the world’s oldest population, hosts the G20 next year, and global ageing will be on the formal agenda. Many nations, including India, Chile, and China, are tackling pension reform.
But governments cannot solve this alone, especially when you factor in the exponential effects of two additional trends:
- In 1950, less than 30% of the world’s population lived in cities. Today, 55% live in cities, a majority expected to climb to 68% by 2050. This urbanization breaks down traditional family support for the elderly, while imposing new and significant infrastructure burdens on public finance.
- Meanwhile, the increase in informal work leaves vast numbers of people unprotected by traditional employment-based pensions. Informality has spread to about 40% of workers in Chile and 85% in India. The growing gig economy will likely further stress pension systems and jeopardize long-term financial security for millions.
Like climate change, the ageing crisis is beyond the ability of governments or private industry to handle alone. But we shouldn’t feel overwhelmed. We can break the problem down into manageable components based on clear goals.
We must collaborate immediately on two outcomes:
1. Expand the number of workers covered by pensions.
2. Increase long-term savings among as many people as possible.
This requires advances in financial inclusion, technology and financial education. Progress is already happening in each of these three areas around the world. True success requires genuine partnership among all stakeholders, though we often work in relative isolation. What if we joined forces to solve this problem?
Effective financial inclusion uses policies, resources and tools to promote access to financial services and to increase personal savings. Recent innovations by the Modi government in India offer a noteworthy example. A successful drive to get millions of Indians to open bank accounts, together with the development of digital payment systems and a unique financial ID, has laid a foundation upon which Indians can build lifelong savings.
More developed economies have reaped dividends from policies that promote the inclusion of more people in the pension system by leveraging behavioural biases. The UK's NEST and New Zealand’s Kiwi Saver have expanded pension participation by 135% and 300% respectively, through automatic enrollment and other inclusive policy tools.
At the same time, private industry is delivering innovative financial tools and resources to help today’s mobile consumers take action. Cultures and disposable income vary widely, making a global one-size-fits-all fintech solution unlikely. Principal approaches this challenge regionally, through digital labs in Chile, Brazil, India and the US.
When technology and innovation empower larger populations of savers, entire communities and nations can benefit. Today, Principal provides digital long-term savings alternatives to nearly eight million people in Latin America and Asia, with more than one third of them saving through automatic investment plans. What we’ve learned in our markets is that financial education and advice are just as necessary as government policy and digital access to encourage a culture of long-term saving.
We believe financial education is most effective when it involves collaboration between governments, local communities and industry. In many US states, businesses support Junior Achievement and other programmes to complement school curricula. In Chile, the Mutual Funds Association has introduced its own financial literacy lessons into many classrooms and is working with the government to expand the programme. Financial knowledge should become a cornerstone of primary and secondary schools, and our global financial services industry must step up with more support.
When it comes to building effective partnerships between government and industry, the World Economic Forum is an ideal hub. The threats of global ageing may be profound. But we’ve been given decades to bring financial security to a greying world.
Our elderly population deserves to be more secure in retirement. Together we can help make it a reality.
This document is intended to be educational in nature and is not intended to be taken as a recommendation.