Retirement savings shortfall could hit $400 trillion by 2050

‘We’re really at an inflection point’; Canada among countries facing problem

Longer life spans and disappointing investment returns will help create a $400 trillion retirement-savings shortfall in about three decades, a figure more than five times the size of the global economy, according to a World Economic Forum report.

That includes a $224-trillion gap among six large pension-savings systems: the U.S., U.K., Japan, Netherlands, Canada and Australia, according to the report issued Friday. China and India account for the rest.

Employers have been shifting away from pensions and offering defined-contribution plans, a category that includes individual retirement accounts and makes up more than 50 per cent of global retirement assets. That heaps more risk onto the individuals, who often face a lack of access to the right options as well as the resources to understand them, according to the World Economic Forum report. Stock and bond returns that have trailed historic averages in the past decade have also contributed to the gap.

“We’re really at an inflection point,” said Michael Drexler, head of financial and infrastructure systems at the World Economic Forum. “Pension underfunding is the climate-change moment of social systems in the sense that there is still time to do something about it. But if you don’t, in 20 or 30 years down the line, society will say it’s a huge problem.”

A shortfall of about $400 trillion could be reached by 2050, the World Economic Forum said. The figure is derived from the amount of money government, employers and individuals would need to provide each person with a retirement income equal to 70 per cent of his or her annual earnings before leaving the workforce.

The gap is partially driven by an aging world population. Life expectancy has risen on average by about a year every five years since the middle of the past century, and half of babies born in the U.S. and Canada in 2007 may live to 104, according to the report. In Japan, the figure is 107 years.

Governments can ease the financial burden by increasing the target retirement age. People would also benefit from improved financial education and services. “A lot of the good solutions already exist somewhere in the world. Just no one has figured them out all together,” Drexler said. “There’s almost no new invention necessary.”