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Major Economies $400 Trillion Short On Retirement Funds

The major economies of the world, including the U.S., may be short $400 trillion on retirement savings.

According to an analysis performed by Bloomberg of a World Economic Forum report, longer life spans and disappointing investment returns will contribute to the $400 trillion retirement-savings deficit in about 30 years. That amount is more than five times the size of the global economy.

The U.S., Japan, United Kingdom, Netherlands, Canada and Australia combined account for $224 trillion of the shortfall. They have the six largest pension savings systems in the world. The rest of the deficit falls on China and India.

Since employers moved away from pension plans and commonly offer defined-contribution plans, such as a 401(k) or individual retirement accounts, these new retirement savings make up more than 50 percent of global retirement assets. The risk associated with them is placed on the individual, who may not have access to the right options or the resources to understand how they work, the report said. There has also been a decrease in stock and bond returns as compared to the previous decade.

“We’re really at an inflection point,” Michael Drexler, head of financial and infrastructure systems at the World Economic Forum, told Bloomberg. “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.”

The World Economic Forum assumed workers would retire between the ages of 60 and 70, and used publicly available data on government programs like Social Security in the U.S. to make its calculations.

The agency attained the $400 trillion deficit figure from the amount of money government, employers and individuals would need to give each person with a retirement equal to 70 percent of their annual earnings before they retire. It estimates the shortfall could be reached by 2050. In the U.S., the savings shortfall grows at a rate of $3 trillion each year.

Life expectancy and an aging world population are partially responsible for the deficit. On average, the report said life expectancy has risen by about a year every five years since the middle of the last century. And, one-half of the babies born in the U.S. and Canada in 2007 may live to be 104. In Japan, life expectancy could be 107 years for 50 percent of the babies born in 2007.

To offset the financial burden, the World Economic Forum suggests increasing the target retirement age, as well as improving 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.”

In the U.S., people born between 1943 and 1954, known as baby boomers, receive their full amount of Social Security benefits at the age of 66, according to U.S. News & World Report. But for those born in 1960 or later, retirement is now set at the age of 67.

Sources: BloombergU.S. News & World Report / Photo credit: Eric Hunsaker/Flickr

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