Trumponomics Delivers The Widest Retirement Savings Gap of Developed Nations (#GotBitcoin?)
Many Americans haven’t saved as much money as they need for retirement—and the gap is expected to widen dramatically in the next 30 years. Trumponomics Delivers The Widest Retirement Savings Gap of Developed Nations (#GotBitcoin?)
The retirement savings gap—between what people have and should have—was $28 trillion in the U.S. in 2015, but by 2050, it’s expected to swell to $137 trillion, according to the World Economic Forum, a Cologny-Geneva, Switzerland-based nonprofit that researched international financial affairs. The disparity grows $3 trillion every year in the U.S.
The organization calculated this gap assuming most individuals’ retirement income sources would include a combination of government-provided pensions (such as Social Security), employer pensions in the public or private workforce and individual savings. They also analyzed the level of savings across expectations of income needs and life expectancies, assuming individuals would retire between 60 and 70 years old, for countries including China, Canada, Japan and the United Kingdom.
The gap is most pronounced in the U.S., followed by China and Japan tied for $11 trillion in 2015. China is also expected to see a significantly wider discrepancy in 2050, at $119 trillion, followed by India, with an $85 trillion gap. Overall, the eight countries the WEF analyzed will see a $400 trillion disparity.
WEF identified three key drivers of the shortfall: people are living longer; more informal work structures, like the gig economy, which can lead to uneven income and weak options for retirement savings; a growing middle class, where wages, costs and quality of living and expectations for retirement income are all inflating. Underfunding of corporate pension plans also contributes to the discrepancies, although barely—especially in the U.S. and U.K. where pension liabilities are under high scrutiny and regulation.
The shortfall may be more emphasized depending on income level. The WEF assumed retirees would need to replace 70% of their preretirement income, but lower earners may need close to 100% of their preretirement income to live comfortably in retirement, whereas high earners might require less. Rates of return will naturally have a significant impact on how much a person ultimately receives in retirement, but low rates are not nearly as substantial of a risk as having no or little stashed away for the future. “Increasing the percentage of those saving, particularly middle- and lower-income earners, will have the most significant impact on the overall level of retirement security,” the report noted.
Retirees can also expect to outlive their savings by years, especially women, the WEF found. U.S. males can expect to outlive their savings by eight years, whereas women may go more than 10 years.
Plenty of Americans stress over the challenges of saving for retirement. Many understand that they need to save quite a bit—some say to the tune of $1.7 million—but they’re not all taking the measures to get there, such as ramping up their contributions to 401(k) plans or using the appropriate investment accounts when they don’t have access to an employer-sponsored plan. Some workers, especially younger ones, say it is nearly impossible to save for retirement, when they have more pressing financial obligations to pay for, like housing, student debt and budding families.
The retirement savings system as it stands needs help, and the government is now stepping in to bring changes that may encourage more Americans to prepare for their far-off futures. Lawmakers have proposed legislation that would incorporate auto-enrollment into employer plans (where new hires are instantly given a retirement account), foster connections between unrelated companies to offer a retirement plan for those that can’t do it alone and perhaps even match employees’ student loan repayments to employers’ retirement account contributions. Trumponomics Delivers The Widest, Trumponomics Delivers The Widest, Trumponomics Delivers The Widest
Men in the U.S. Could Outlive Retirement Savings by 8 Years—and That’s the Good News
Not having enough money for retirement isn’t just a problem in the U.S.—and it is actually worse elsewhere.
Men in the U.S., on average, could outlive their personal savings by 8 years and women by 11 years. While not good, it is better than the prospects for their peers in 6 major developed economies studied in a new World Economic Forum report highlighting a growing global deficit in retirement savings.
By 2050, the number of people over the age of 60 is expected to hit 2.1 billion—about double that in 2017. Pension and government welfare systems and retirement savings globally haven’t kept pace with longer life expectancies, according to the report released on Thursday. The group projects a $400 trillion shortfall by 2050 in retirement savings, up from $70 trillion in 2015, in the 6 developed economies with large retirement systems—Canada, the Netherlands, Japan, Australia, the U.K. and the U.S.—plus India and China.
The challenges to retirement security have been discussed for years, as have many of the suggestions laid out in the World Economic Forum report. “But what is surprising is that they haven’t done anything about it,” says Han Yik, co-author of the report and head of institutional investors for the World Economic Forum. “This is a problem that requires all three: government and policy makers, employers and individuals and isn’t something individuals can save their way out of on their own.”
To underscore that point, the World Economic Forum looked at personal savings, excluding employer-based retirement plans, pension and social security, to gauge the risk retirees faced in outliving their assets in different countries. The report didn’t include employer-based plans and pensions because not everyone in the U.S., for example, has access to work-based plans and pension and government welfare systems are under strain, Yik says.
Through this lens, U.S. men are at risk of outliving their assets by 8.3 years, and women by nearly 11 years because of the longer life expectancy. That is far better than the 15-year deficit Japanese men face and 20-year deficit for Japanese women. Longer life expectancies, as well as personal savings largely allocated to cash, contributed to the magnitude of the shortfall.
Two of the suggestions by the World Economic Forum focus on how to invest retirement savings: One, rethink risk so that, for example, money not needed for decades isn’t sitting in cash and, two, diversifying investments both globally and into alternative assets to generate better returns. In countries with the smallest deficits, like the U.S. and the Netherlands, people often use a target-date fund with a glide path that starts with higher stock allocations that decline gradually over time—a system Yik says generally works better. Having too much equity-like assets can also hurt, though, as is the case in Australia, where allocations tend to be static in a balanced fund.
Another way to reduce the retirement deficit, at least in the U.S., is if all employers sponsored a defined-contribution plan. Such a move would reduce retirement deficits for those 35 to 39 years old by 24% and those 40 to 44 by 19%, according to a separate report released Thursday by nonpartisan think tank Employee Benefit Research Institute
Each country has its own tax incentives and retirement systems, making one-size-fits all recommendations difficult, but the World Economic Forum highlighted some other options.
One proposal is to raise the retirement age, but it is also one of the most politically difficult. “Even in Russia, when [Vladimir] Putin did it, his approval rating took a hit. Can you imagine it everywhere else?” Yik says. There have been attempts, though: Denmark indexed the retirement age to increasing life expectancies, while Chile has used positive reinforcements, contributing more to retirement accounts of those who delay retirement.
Also helpful would be to create a dashboard-reporting tool like that used in Australia, the Netherlands and Denmark, which pools information from accounts accrued through different jobs, and projects government and other retirement benefits, to give individuals a better idea of where they stand.
One of the biggest challenges is making retirement savings last over a lifetime, especially when people are living longer. While some people assume a fixed rate of spending in retirement, the World Economic Forum says spending tends to be variable, often higher in the beginning and then declining as people age and slow down. Retirees are also picking up part-time or gig jobs in retirement. That requires flexibility when drawing down retirement savings, and can make a one-sized fit all default option in withdrawing money difficult. One option: Australia lets people customize how they spend down their retirement savings.
Meanwhile, emerging markets like China and India don’t have well-developed retirement systems yet. That could be a blessing in disguise by allowing them to take what is working elsewhere to create a more-sustainable alternative. Trumponomics Delivers The Widest