Aging populations, low birthrates require retirement solutions

Each year, key executives from Prudential Retirement gather with policy makers, business leaders, and researchers from across the globe for the annual International Longevity Risk and Markets Solutions Conference to address aging trends and the global challenge of creating retirement security.

This year’s conference was hosted in Taipei, Taiwan, where data indicate that by 2050, the size of the workforce responsible for supporting retirees will be less than half of what it is today. Offering insights into how we grapple with this demographic shift were Dylan Tyson, the Chief Executive for Prudential of Taiwan, and Amy Kessler, Prudential’s head of Longevity Risk Transfer.

Dylan Tyson: The pace of aging across the world is indeed breathtaking. Not only do 60 percent of the world’s senior citizens live in the Asia Pacific region today, but the pace of aging in Asia—especially in East Asia—is faster than in any other region.

One way of measuring societal readiness for retirement is by comparing the number of working-age people who will support each senior citizen. Known as the Old Age Support Ratio, this measure is the number of people age 15-64 divided by the number of people who are 65 and older.

Using this measure, we can see that in 1950, across the planet, there were 12.5 working-age people supporting each senior citizen^[1]. As of 2015, this ratio has fallen. Fewer than eight people now support each senior citizen. And by 2050, only 4 people will be supporting each senior citizen, worldwide^[2].

East Asia shows the fastest pace of change of anywhere in the world. There, fewer than two people will support each senior citizen in East Asia by 2050^[3]. This is dramatic change, and it poses risks for public finances, health care, as well as sustained economic growth.

One way to buffer the impact of these changes is through strong financial readiness for retirement. By 2050, the effect of the rapid aging of society on retirement readiness is painfully apparent, moving every country to a situation that is far less manageable. Unless we act decisively, the challenge will get worse as we lose the benefit of time to shore up our financial readiness to address the challenge.

Amy Kessler: Along with the changing demographics, several factors are making it harder for people to achieve retirement security.

1. Fewer employers are offering pensions with lifetime income.
2. People are living longer and will spend more years in retirement.
3. Health care costs are rising.
4. Interest rates are low, making it harder for people to build their savings.
5. Government support provided to each person will have to shrink as the population ages.

Despite these challenges … we can create retirement security.

Creating retirement security ideally starts with a person’s first paycheck and takes an entire working lifetime. At every step along the way, life insurers can provide support for saving and investing to help people achieve retirement readiness and financial wellness.

For the new hire, first and foremost, we must overcome procrastination and the natural disbelief that we may spend 30 or 40 years in retirement. Auto-enrollment helps with both. It brings all new employees into a retirement savings program as soon as their first paycheck and puts the power of compound earnings on their side throughout their working lifetime.

Optimism bias is the human belief that our savings will grow, and we will be able to work as long as we wish. But we need to be financially prepared for challenges in life, like illness and recession. Auto-escalation can help by increasing the amount of money set aside from each paycheck as time passes and a person’s income rises.

Paralysis is the natural human reaction when faced with too many choices. Many people freeze when trying to choose investments and many people overreact to market events by selling risky assets as markets fall. Target-date funds can help. They provide a diversified investment portfolio with a risk-and-return profile aligned for a person who knows roughly how much longer they wish to work.

For individuals at or near retirement, a lifetime income product could be ideal. In the years before retirement, a person can continue to save and invest, all the while knowing how their savings would translate into guaranteed lifetime income after retirement. With this clarity, people can confidently decide when they are ready to fully retire and take income. For an additional fee, the income is a predictable annuity stream for life, and a built-in death benefit for loved ones. Some will recognize that they may need to or want to work longer, defer some or all of their benefits and potentially grow their guaranteed lifetime income. 

This offers people the sort of real flexibility they need to work part time in semi-retirement, care for a loved one, overcome an illness or start a small business—the possibilities may be endless. 

Life insurers are uniquely positioned to help people achieve retirement security at every step of their working and retired lifetimes. We can design sensible lifetime income products and prudently manage capital and risk. We can carefully match asset cash flows to our liabilities and pool longevity risk for individuals to help them secure guaranteed lifetime retirement income at a reasonable cost. Moreover, we can adapt insights and best practices from all over the world to markets where the focus on individual retirement security is emerging.

For a media interview with Dylan Tyson or Amy Kessler, please contact Gregory Roth.