The world is growing older and we are living longer than ever before. The average age and life expectancy of a person are increasing. This trend is shifting our population demographics to an older society. The reasons are simple: advances in medicine and technology allow us to live longer than ever before and we are having less children. Since 1970, life expectancy at age 60 has increased from 18 to 23.4 years in OECD countries while the fertility rate has decreased from 2.8 children to 1.7.
The world is getting older
The most recent World Health Organization (WHO) average life expectancy at birth estimates are 72 years (73.8 years for females and 69.1 years for males). Among OECD members, it is 80.1 years. While average life expectancy varies between different regions and countries, according to a study conducted by Imperial College London and the WHO, there is a high probability that by 2030, the 90-year average life expectancy barrier will be broken. The same study predicts that life expectancy is expected to continue to increase in all 35 industrialized OECD countries included in the study.
As a result of these trends, pension commitments of developed countries are under pressure. Life expectancy was underestimated when pension commitments were made and it was assumed that the decline in mortality would stop but this never happened. Also, the difficulty of generating the required return on assets to maintain pension commitments in a dynamic economic environment was also underestimated.
To adjust to the changing demographics, many countries in the OECD area have increased the age of retirement to 65–67. Whether this change has the desired effect remains to be seen. It has already been suggested that the retirement age should be further increased to 70. Even if this change were to be implemented, it is not a comprehensive cure-all solution to pension problems which begs the following question: why do we even have an official retirement age?
Countries’ response to an aging society
Most countries have legislation indicating an official retirement age but on average, people retire well before. For example, in 2014, the average retirement age in Germany and Austria was 62.7 years even though the official retirement age is 65. In Korea, even though the relatively recent change in the official retirement age from 55 to 60 has pushed the average retirement age to 61.1 in 2017, many private companies continue to demand that workers take early retirement. In Canada, the average age of retirement is 63.6 when the official age is 65. This might not seem like a big deal but for many, this has serious financial implications.
According to the World Economic Forum, the retirement savings gap will rise from 70 trillion to 400 trillion by 2050. The gap is defined as: “the amount of money required in each country to ensure a retirement income equal to 70%, of a person’s pre-retirement income.” Experts have determined that this is the amount required for a person to live comfortably in their later years.
Not enough savings and not enough workers
At the same time, there is also a labor shortage in many developed countries around the world and as the population ages, this will only get worse. There are thousands of jobs that currently cannot be filled due to a lack of qualified applicants. The jobs in demand range from highly-skilled tech jobs to so-called normal jobs in fields like sales, hospitality, customer service, transportation, proofreading and editing, accounting and bookkeeping. The inability to fill these jobs is negatively affecting productivity everywhere.
For example, the labor shortage in Germany, which is projected to be 4% in 2020, is expected to increase to 23% by 2030. In South Korea, the 6% labor shortage in 2020 is expected to grow to 26% in 2030. In the UK, from 2012–2022, 12.5 million jobs will be vacant due to retirements.
Every day, thousands of capable and knowledgeable people are leaving the workforce. As a result, the wealth of knowledge and skills of these retirees leave with them. Perhaps more importantly, this knowledge is not being transferred to the next generation creating a knowledge drain affecting all industries.
It is clear that there are significant challenges facing our society and there is no one solution. A variety of measures will need to be implemented in order to adapt to our changing demographics. Further action needs to be taken by both public and private sectors in order for us to transition to a world that is older, but wiser.
