In a report published last week Mercer has laid out a four-pronged plan to bridge a global retirement savings shortfall that it says could hit over US400 trillion by 2050.
The ‘Bold ideas for mending the long-term savings gap’ paper says out-dated “formal and informal social insurance systems” were not designed to withstand the challenges posed by aging populations in the developed world and rising middle-classes in emerging economies.
Mercer says the combined retirement income gap of just eight countries – Australia, Canada, China, India, Netherlands, UK and the US – currently stands at some US$70 trillion, or 1.5-times the GDP of their collective economies.
“And without immediate and concerted action, these eight countries are on a course to face a combined shortfall of US$400 trillion by 2050 – a growth in the gap of $28 billion each day,” the report says.
According to Mercer, “governments, employers and financial intermediaries” must embark on a joint program to eradicate the savings deficit across four broad strategies, namely:
- Sparking a ‘financial fitness’ revolution among consumers;
- Helping individuals recognise ‘good’ retirement solutions;
- Designing “smart” retirement products; and,
- Redefining the concepts of work and retirement.
“Transforming saving into an engaging consumer experience rather than a financial services experience… could create the same explosion in the savings industry that we’ve seen over the past several decades in fitness,” the Mercer report says.
But as well as rebranding savings as a fun exercise, the study says employers and governments must help consumers recognise quality financial products and services – in a move beyond ‘financial literacy’ programs.
“Our research has found that greater financial knowledge by itself rarely translates into action,” Mercer says. “What does spur action is giving individuals access to smart tools, default options and guidance that can help them achieve success.”
Governments should also ban lump sum pension payouts while the industry could help the cause by designing products tailored for longer retirement periods.
“For example, the smartest of these products are designed to allow investments to continue to grow during retirement,” the report says.
Finally, Mercer says as lifespans continue to ratchet upwards governments will need to consider “raising or even eliminating” fixed retirement ages.
“This action could go a long way toward improving the solvency of government pension systems,” the report says.
Governments have already been heeding that advice including the current NZ National Party-led administration, which recently announced plans to raise the pension age to 67 by 2034.
Last week, too, the UK government fast-forwarded an increase in its pension age from 67 to 68 by 2039 – seven years ahead of schedule. The UK news came just days after doctors in Japan argued for lifting the mandatory retirement age there to 75.
However, the Mercer paper argues a multi-disciplinary approach is urgently needed to avert impending disaster.
“Our current trajectory is putting large numbers of people at risk of poverty, undercutting the competitiveness and… cohesion of our societies and diminishing the productivity of workers.”