Running Out of Money

Running Out of Money

          Bloomberg News today posted an article titled, Retirees Might Run Out of Money 10 Years Before They Die.  It’s a title intended to shock people into action or at least awareness.  I have a strong interest in this topic. In 2013 I published the book Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap, published by Wiley & Sons. The book was based on ten years of lecturing at Cornell’s Johnson Graduate School of Management on the topic of pensions. Publishing that book played a big part in getting made the school’s second Clinical Professor.  Strangely enough when I called the course Defined Benefit Pensions in Transition it drew 7 students.  When I changed the name to Liability-Driven Alpha, it drew 50 students.  No one wants to think about pensions.  They’re boring…right up until you need one.

          The main message of my book and course was that we had a big problem as a world and that the chickens were coming home to roost in the next thirty years in tragic amounts.  I claimed that the global gap was $110 trillion.  That assumed a need for 60% of final income during retirement.  This Bloomberg article cited a study by the World Economic Forum that estimates a gap of $400 trillion in 2050 (up from $70 trillion in 2015) that assumed a need for 70% of final income during retirement.  The details of the exact math used is irrelevant since the world only has $200 trillion or so in total monetized assets and either amount is a massive wet blanket on growth for the entire world for the next two generations.

          Technically, the price can get paid by either reduced growth for the young or reduced standards of living in retirement for large swaths of people. The article articulates the problem as the number of years people will have to live past their money.  The range is between 8 – 20 years.  It’s one of the few things men win.  Women have a bigger problem due to their more persistent longevity than men.  The problem is that longevity for men today is about 83 (18 years past a 65 retirement age).  In 1946, the longevity for men was 63 and retirement age was 65 (-2 years of average retirement).  The study says men only have money to live 10 of the 18 years.  After that they are wards of the state or family.  To balance the books and assuming they start living on 70% today, they can dig out of that 8 year hole by working another 3 years (depending on investment performance) until age 68.  That still leaves 15 years of retirement for the average man, far longer than at any time in human history.

          One of the most serious warnings I declared in my book was that we are headed towards a species-defining crisis where caring for our elderly will be in direct conflict with providing for our young.  It doesn’t get more difficult to choose than that.  What is undoubtedly going to happen is that whatever lifestyle the world can rise to in the next thirty years (through productivity gains or whatever), it will be dramatically dampened by this gap.  Whether you think of it as getting paid by the children of the elderly or by rising taxes across the board, it is all going to be a painful crimp on the growth curve.

          When you combine these demographically-driven retirement statistics with the wealth concentration numbers you get an even starker picture.  The numbers spewed out by the World Economic Forum, the Mercer Melbourne reports or even my book (based generally on Towers Watson numbers) are all averages.  If you get down to realities, the amount of money in the hands or accessible to the majority of people who need pensions in retirement to meet basic needs is almost non-existent.  So, think of the problem this way, even if Gates, Buffet, Bezos (Mr. & Mrs.), Carlos Slim, Bernard Arnault (of LVMH fame), Jack Ma (Alibaba), Masayoshi-Son (Softbank) MBS (representing Saudi wealth) and Mark Zuckerberg and all the other billionaires decided to chip in big time, there is simply not enough money in the world to fill the funding gap created by the retiring Baby Boomers.

          This is differentially bad in certain countries, with the key indicators being the degree of current consumer prosperity (which goes to expectations), the amount of pension–designated assets held and the population growth being the key defining characteristics.  What it shows is that the aging, xenophobic Japanese economy is in the worst position by a long shot.  China is not in a great place thanks to its one-child policy and the havoc it has wrecked on their old age dependency ratios.  The U.S. is problematic mostly due to underfunding in state and municipal pension schemes, generally underfunded defined contribution plans which have always been voluntary (as opposed to Australia, where they are mandatory) and some degree of concern about the social security system.  What’s noteworthy is that even the Netherlands, which shows up on most charts as one of the best funded programs (along with Norway and Switzerland) is showing cracks to the point that pensioners and employees are protesting the proposals to shift retirement back two or three years.

          I hesitate to mention the nastiest part of this whole mess, but none of these unfunded liabilities and gaps include the gaps for unfunded post-retirement health care.  That is an entirely different bucket of woes that for most countries falls squarely on the back of the government through universal healthcare programs.  No matter whose back it falls on, it is the same sort of wet blanket on growth of the economy just the same.

          What we are looking at is a future for a 9+ billion population planet where technology is allowing everyone to live longer, so people will need to work longer, save more, invest wisely (including investing more aggressively in the post-retirement years since that is where the economic impact resides in the equation), and this all has to happen in an environment where fewer workers support more retirees and see their earnings taxed at higher and higher rates such that economic growth is most likely to be sub 2% (something that is also strongly suggested by the declining global birthrate and general population growth).  What that describes is not a happy scenario.  More and more people will be running out of money every day, so spend prudently.