Eight large countries, including the U.S. and the U.K., are currently facing a $70 trillion gap between aggregate long-term savings systems and expected annual retirement income needs, underscores Mercer. In its recent report entitled “Bold ideas for mending the long-term savings gap,” the firm highlights that the size of the gap is growing, and all stakeholders should initiate urgent steps to mend the issue.
Current long-term savings systems are inadequate: Mercer
According to the report, the global average life expectancy at birth shot up from 34 years a few generations ago to a high of 71. Of note, about half of those born today in the developed world are expected to live more than 100 years.
Inflation has been a big focus of Wall Street in recent months, and it won't go away any time soon. But where do we stand with inflation? Has it peaked, or will it continue higher? Q2 2021 hedge fund letters, conferences and more Nic Johnson of PIMCO, Catherine LeGraw of GMO, and Evan Rudy of Read More
The paper adds that amidst the shifting demographics and new economic realities, the existing long-term savings systems, laws, schemes and products are inadequate for buttressing current and future generations into old age.
The report advocates designing appropriate solutions to surmount the challenges contributing to such long-term savings gaps. For instance, persistent low interest rates are exacerbating the long-term savings gap, with both equity and bond returns dropping below their historical averages. Highlighting the lack of easy access to pensions and savings products, the report notes that even workers in formal jobs are less likely to use robust workplace savings plans.
However, the research paper strikes a confident note, adding that despite such numerous challenges, stakeholders can embrace four bold ideas that can have tremendous potential to mend the gap and face the challenges.
Four ideas to mend the savings gap
As part of its first idea, Mercer draws an analogy between fitness and savings. Like the consumer revolution was fueled in the 1970s by fitness enthusiasts like Jack LaLanne, the report’s authors believe a similar revolution is required to engage individuals in savings for the long term. Tools such as Fitbit are providing users improved access to information and immediate feedback on their fitness goals. However, it’s difficult for individuals to track the progress of their savings or whether they are meeting their goals. Hence, the report suggests developing useful tools that facilitate tracking the progress of individuals’ savings in real-time.
The report also suggests that the government and employers assist individuals with assessing products, gathering information and discriminating among financial intermediates. For instance, a quality financial intermediary who doesn’t “churn and burn” will create greater appetite among individuals to build adequate long-term savings.
Mercer also suggests designing smart systems to create appropriate combination of growth and defensive investments to generate superior retirement outcomes. A fourth idea from the the analysis is enhancing or even eliminating set retirement ages to reflect the fact that people live longer than past generations did. Citing research from Chamberlin J, the report notes that working correlates to increased health in physical, emotional and cognitive areas.
Striking an optimistic note, the study concludes that by designing smarter savings systems and redefining work and retirement, societies and businesses stand to reap substantial dividends.