The World Economic Forum, in conjunction with Mercers (the actuaries) recently estimated that the combined pension deficit currently stands at $66.9tr for eight countries, rising to $427.8tr in 2050. The eight countries are Australia, Canada, China, India, Japan, Netherlands, UK and US. Of the 2016 figure, $50.5tr is unfunded government and public employee pension promises.
Yes, we are now talking in hundreds of trillions. Other welfare-providing states missing from the list have deficits that are additional to these estimates.i
$66.9tr is roughly 1.5 times the GDP of the eight countries combined, and $427.8tr is nearly ten times. Furthermore, if we take out the non-productive government element, the figures relative to the private sector tax-paying base are closer to twice productive GDP today, and thirteen times greater in 2050. That 2050 deficit assumes a 5% compound annual growth rate. This is a linear projection, but the deterioration in finances for unfunded government pensions may turn out to be exponential, in line with the accelerated increase in the broad money quantity since the great financial crisis.
The problem is mainly in the welfare states, so we know that the welfare states are in big trouble. Governments routinely offer inflation-protected pensions to state employees, funded out of current taxation. The planners in government treasury departments are coming alive to the scale of the problem, though the politicians would rather ignore it. Government finances are already being subverted by both unfunded pension obligations, and by additional rising healthcare costs for aging populations.
Furthermore, people are living longer. Someone born in Japan ten years ago who retires at 60 can expect to live to 107, leaving the state picking up a forty-seven-year welfare and pensions bill. And it’s not much less expensive in other countries, with 50% of North American and European babies born in 2007 expected to live to 103.
The global dependency ratio, those in work relative to those in retirement, is expected to deteriorate from 8:1 to 4:1 by 2050. When most people retire, they stop paying income tax and become a burden on the state welfare system. Therefore, retirement ages must rise. Not only must they rise, but they must rise by enough to pay for those who are otherwise fit but mentally incapacitated by dementia, Alzheimer’s and Parkinson’s, set to spend the last decades of their lives expensively kept.
That is the background to a global problem. But we shall just say ‘poor taxpayers’, and move on. Instead, this article focuses not on the problems of funding state pensions (which is admittedly 75% of the problem), but is an overview on why the current low growth, low interest rate environment is so detrimental to private sector pensions.
This post was published at GoldMoney on JUNE 08, 2017.