The retirement crisis is a slow-moving financial crisis affecting the developed world. With no proper solution in sight, it’s time to take responsibility and prepare for retirement ourselves.
In their latest documentary, news outlet Deutche Welle called the retirement crisis “the slowest moving financial crisis.” This could well be the worst crisis facing the developed world, with no proper solution in sight. People around the world were shocked during the latest protests in France. A small retirement reform resulted in chaos. What explains this? Could this replicate in other countries as well?
One of the most serious issues facing the industrialized world is the increasing age of the population. Apart from war and unrest worldwide, the silent and deadliest financial crisis facing us is a demographic crisis. Although the population is still on the rise in the developing world, the other half of the world faces a completely different scenario. However, as birth rates decline and the world population gets older, this problem will eventually catch up with the rest of the world.
One of the best metrics to analyze this problem is the old-age dependency ratio. Defined as the number of individuals aged 65 and over per 100 people of working age (those aged between 20 to 64) across the developed world this ratio has been increasing. For example, in Japan, the old-age dependency ratio is greater than 50% from approximately 12% back in 1980. OECD further estimates that this ratio will reach 80% by 2050. There is no viable way to sustain this. The country faces a decline in population owing to very low birth rates and migration. Japan is now encouraging re-employment for the older retired generations. Unsurprisingly, the idea of working until death does not appeal to many people.
Most countries in the OECD and around the world follow the pay as you go pension system: workers paying into the system and drawing from it once they reach the retirement age. In such a system, when you have retirees drawing in for a longer time and a shrinking labor force, you have a shortfall. Thus, an increasing number of young people are now paying for the pension of retirees. This makes it increasingly difficult for many governments to keep up with the payment. What has resulted in the current stalemate is nothing else but governments’ failure to diagnose and address the problem earlier. No wonder why any attempt to reform the system is drawing mass criticism from the citizens.
The system can be reformed in many ways, none of which is very popular. One way to reduce spending is to decrease the payment given to retirees, a very unpopular move. This is also unfair to retirees who spend their entire life working, denying them a decent life after retirement. The other way is to increase revenue by increasing taxation. This move can be counterproductive and can decrease revenue as firms move from a high-tax state. The other approach, experimented in France, is to increase the retirement age or as mentioned above (Japan), encouraging retiree re-employment
Apart from government failures, shouldn’t we as citizens also take some responsibilites for it? We rely excessively on the government to take care of us once we retire. The onus should be on us to take care of ourselves. As the current scenario shows, governments are prone to failures and mistakes. The retirement crisis does not need to be a crisis at all if we all start saving ourselves while working while proper reforms are implemented. DW notes that an average person in the developed world who is in their mid 60s has saved enough to live until the early 70s. That itself might be a conservative estimate. However, with the current life expectancy these people will continue to live into their 80s.
As people continue to live longer, this problem exacerbates. Increasing the population through emigration or higher birth rates might be an obvious answer. However, owing to lifestyle changes and the high cost of living, people have fewer children. In the developing world as well, the birth rates are also falling. In many developing countries, the birth rate is getting close to the replacement level. Some are still far away; however, even here, the birth rate is falling. Therefore, they may also have to start thinking about how to deal with the retirement crisis. As the labor force shrinks in these countries, it will have a devastating impact on their economic progress.
Labor is one of the most important inputs for economic growth. With labor on the decline, countries will have to find other ways to grow and sustain a high-quality lifestyle. Earlier, economists used to say that you grew old after you became rich. Currently, the trend is changing. Many countries in Eastern Europe and Asia are now aging, even before they become rich, China is a good example of such a trend. Although it still has a lot of potential to grow, the biggest hindrance and challenge is the ageing population.
The demographic challenge is the greatest challenge facing us in the 21st century. It waits to be seen how countries can afford to maintain high quality of lifestyle. The onus should also be on all of us to prepare for a retired lifestyle. Countries’ are coming under increasingly high pressure, and the way each country deals with the problem will also be one to look for.
- Adithyan Puthen Veettil holds a Bachelor’s in economics and is a student doing his master’s in international studies at the Diplomatic Academy, Vienna. Adithyan is spring intern 2023 at the Austrian Economic center.