The pension time-bomb.

Boomers, Zoomers and imminent Doomers. The retirement idea.

In 2019, 1 in 11 people were of retirement age - 65 or older. By 2050, that number will be 1 in 6. We are living longer, yet we are not aging proportionally (function, memory, physical stature are not scaling with age) and the elderly require care that comes at a steep price. Out of 11 people in 2019, 1 was aged 65+, but 1.5 were aged <18 y.o, so, only 8.5 can be considered contributors (tax paying earners) to the 2.5 ‘recipients’. Assuming birth rate remains constant (this will not happen), in 2050 we will see 1 in 6 aged 65+, and 1.5 aged <18, so there will only be 3.5 contributors for every 2.5 recipients. The ‘contributions’ - social, emotional, physical, financial - vary from culture to culture; the East likely maintaining their family orientation, while the West look to outsource most of this work.

The notion of contributors and recipients is drawn from the Western world’s working age definition being 19 to 64, where between these ages we form the taxable population. Following two decades of preparation and five decades of contributing to public expenditure, the ideological Westerner says ‘enough is enough, what about me?’ They are of course referring to a retirement or pension scheme, although prolonged life in the modern world is harsh - so ‘retirement’ as we know it today may cease to be a option. Millennials have to re-negotiate the contributor/recipient-ratio time-bomb, most likely through re-writing the contributor/recipient relationship altogether.

If you live somewhere lucky enough to live to 65 AND have a state capable of providing financial compensation, you may be eligible for a public-pension. The world’s first ever retirement scheme - AND entirely funded from general taxation (unheard of at the time) - the New Zealand pension came to fruition in 1898, when the average NZ life expectancy was 46 years old! The public pension is a great idea when no-one is living long enough to reach eligibility. BUT, OECD’s average life expectancy is now 80+, AND since 1898 average global life expectancy has risen from around 30 to over 70 years old. Therefore, the New Zealand pension scheme, almost untouched in 120 years now must provide financial support for 15+ years to every New Zealander aged 65+, something it was never designed to do. Warren Mosler’s (2010) forth of ‘Seven Deadly Innocent Frauds of Economic Policy’ - “Social Security [promising] pensions and healthcare that it will never be able to afford” - hits this on the head.

Governments simply cannot produce the financial return needed to sustain this funding through taxation revenues. What of private pensions? Privatisation naturally brings competition and can yield higher returns, but importantly, it transfers risk from State to individual, so it’s a no-brainer for States to offload our 15+ year period of being a recipient. Private pension payrates dwarf public pension payrates, but private pensions will need to 3X their returns between now and 2050 just to make this a viable option. New Zealand introduced public-private hybrid ‘KiwiSaver’ as a means of encouraging the public to take their pension into their own hands via personal contribution and a mandated employer contribution, whereby a small percentage of income is deposited on your behalf. However, one of the hardest impacts of the 2008 global financial crisis was on private US pension schemes. (Reuters) - “Global pension fund assets in the 11 major pension markets fell by $5 trillion in 2008, hit by volatile markets". More importantly, a large portion of the US $30T debt is owned by the public sector, so with debt ceiling talks rampant currently, a State pension fund vaporisation a-la ‘08 wouldn’t surprise anyone.

So are there any options for securing sufficient financial contributions before the dreaded 3.5 contributors for every 2.5 recipients ratio of 2050?

1) Increase tax rates for ‘contributors’ with the promise they too will be taken care of come retirement? Given the two biggest determiners of public pension expenditure are mean population age and labor force participation rate, getting taxed blind every day of the week and twice on Sunday is a guarantee.
2) Allow public and private pensions to invest in new, high-growth markets - crypto of course is the prominent example. In 2020 the New Zealand Funds Management - who operate the Kiwisaver scheme - invested 5% of its portfolio into Bitcoin. This investment saw a 600% return in 6 months. Earlier in 2021 the New Jersey State Pension fund invested $7M in Bitcoin mining and just yesterday (22nd Oct) the Houston Firefighters Pension fund purchased $25M of Bitcoin and Ether.
3) Multi-governmental Cooperate tax agreement? On October 8th 2021, 136 countries representing 90% of global GDP agreed in principle to implementing a minimum tax rate of 15% on all corporate profits. The deal was championed by US Treasury secretary Janet Yellen and brokered by the Organisation for Economic Co-operation and Development (OECD). The idea is to stop corporates such as Facebook and Amazon from funneling profits into tax havens (Ireland, Samoa, Estonia, etc), and this will stop those tax haven States race to the bottom (lowest tax wins). Therefore, corporates will pay 15% in the geographical jurisdiction in which they sell their goods and services, injecting taxation revenue. The agreement must first get past US Congress and a G-20 meeting in Rome. Some poorly countries have indicated they will not sign up, citing lack of fairness (Nigeria, Kenya, Pakistan and Sri Lanka for example). My concern lies around starting the path towards a truly global State who further concentrates the centralisation of surveillance, control and information. The OECD estimates this tax agreement would produce $150B annually, increasing the domestic ‘pot size’ for public-pension expenditure.

In my opinion, public pensions are done, dead and buried, while private pensions are subject to slimey corporates and unpredictable nature of market returns.

3) Increase fertility? More workers, more money, more pension? Bongaarts (2004) encourages higher fertility, however growing global population has been a no-go topic for many years, so suggesting increases may not float well. To actually increase population correctly (sustainable rate + increasing infrastructure, etc) would be difficult and potentially grossly immoral. Banking on potential future-taxable outputs is an extremely long play.
4) Encourage net-migration from East/South to West to fill the labour shortage?
Intriguing, deluded, or inevitable? I can’t decide. This is the most affordable and socially conscious solution for a global world, utilizing an abundance of potential contributors in the East/South, bringing them West, accounting for recipients, and sent savings remittances back to the East/South regions. But why would the East/South send their contributors West to prop up Western ideals which plagued the East/South i.e colonial times? And who would contribute to their pension funds if they eventually decide to retire in the West?
5) Increase net-migration from West to East/South ;- lead the horses to water?
Migrate the entire complex of elderly care to the workforce of potential contributors, freeing up taxation revenue/pressures. It’s very logical and would truly bolster the economies of regions willing to invest in the infrastructure and play the long game.

Digital Identification (DID’s) - which are much closer to roll-out than you might think - will allow for frictionless cross-border movements, fit for the 21st century [post-covid world]. On the other hand, DIDs allow States access to our financial, medical, criminal, cultural, political and other history, allowing them to cherry-pick entrants based on pre-perceived notions of who will, and who won’t benefit our state. A scary proposal.

For the pension scheme to live on, it must be reformed and reinvented for the 21st century lifestyle. If not, the concept of retiring will flop altogether due to unsustainable population demographics. Will Millennials work out a solution, or work forever?

references cited
Bongaarts, J. (2004). Population aging and the rising cost of public pensions. Population and Development Review, 30(1), 1-23.

United Nations. (2019). World population prospects 2019: highlights. Department of Economic and Social Affairs, Population Division.
https://nzhistory.govt.nz/old-age-pensions-act-passes-into-law

Max Roser, Esteban Ortiz-Ospina and Hannah Ritchie (2013) - "Life Expectancy". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/life-expectancy' [Online Resource]

Mosler, W. (2010). Seven deadly innocent frauds of economic policy. Davin Patton.