How Much Is $15.8 Trillion Anyway?

My Comments: Big numbers tend to go in one ear and out the other. If I say that 2050 is but a mere 30 years from now, many of you will shrug your shoulders. Because even 30 years is sometimes too big a number to grasp. Yet, the number $15.8 Trillion could be become very personal.

Right now they’re rioting in France because there’s a pension crisis going on. What people are accustomed to receiving is likely to shrink. Big time. Give it 30 years and the place will collapse without either a change in attitude or changes in where people can expect money to come from.

During my 45 year career as a financial planner and investment advisor, I’ve seen many changes in how we set aside money for retirement. Our life expectancy, not to mention inflation, is making future money worth less than it is today.

For much of the past 80 years, people who worked for corporate America, along with States and local governments, experienced a retirement mechanism for providing money in retirement called a ‘defined benefit pension plan’. What you got as a benefit was a function of how long you worked there, and how much you earned. Today, that mechanism has all but disappeared.

If your future retirement income is dependent on that mechanism, you have a major problem to deal with. There’s not enough money set aside for most of those employers to pay what people are expecting. It’s beyond being a crisis.

The challenge for millions of existing retirees and future retirees is to find a solution when you don’t have enough money coming in every month.  No one is going to show up at your front door with a check to make the problem go away. You’re on your own.

By Rich Miller \ 14 NOV 19 \

The U.S., China and other leading economies confront a massive funding gap of $15.8 trillion in 2050 to ensure lifetime financial support for their aging populations.

That’s according to a report spearheaded by former U.K. Financial Services Authority Chairman Adair Turner for the prestigious Group of 30, comprised of current and former policy makers.

“If public policies and individual behaviors do not change, many countries’ pension systems will face a severe crisis, threatening either unaffordable public expenditure pressures or inadequate incomes for retirees,” Turner said in a statement.

Widening Gap

The projected $15.8 trillion shortfall is adjusted for inflation so the actual nominal dollar amount in 2050 will be materially larger, equivalent to 23% of global gross domestic product that year, according to the 75-page report.

The G-30, which includes Bank of England Governor Mark Carney and former U.S. Treasury Secretaries Timothy Geithner and Lawrence Summers, mainly blamed antiquated pension and retirement systems for the yawning financing gap, which it pegged at $1.2 trillion in 2018. Smaller projected returns on savings — in an era of low interest rates — aggravate the problem.

The report – which covers 21 countries, including Japan, Germany, India and Mexico, accounting for 90% of global GDP – said the coming crisis is not just about pensions. Lifetime financial security also depends on the availability of public health, housing and transportation services, as well as on informal community and family support.

The G-30 advocated a mixture of policies to tackle the problem:

  • Increasing the official retirement age by at least four-to-six years by 2050 while enabling people to work longer. A quarter of the funding gap could be closed if retirees on average worked 20% of the time of standard-aged workers.
  • Promoting higher savings by individuals and increasing taxes to support public pensions. Such steps might include mandatory savings programs.
  • Accepting that expected incomes in retirement may need to be lower. For middle and high-income retirees, that might mean living on 60% of average pre-retirement incomes, rather than 75%.

The report’s working group, which included UBS Group AG Chairman Axel Weber and BlackRock Vice Chairman Philipp Hildebrand, also called for action to reduce the administration and asset management costs borne by people saving for retirement. That might include establishing national utilities to provide bulk processing and purchasing of asset management services.

Reforms to minimize investment management costs must be a priority, according to the report.

The G-30 said that while the shift by corporations away from defined benefit to defined contribution retirement plans like 401(k)s for their workers had in some ways been inevitable, it has not worked out well for many individuals. The group suggested hybrid retirement programs as a possible solution, including guaranteeing minimum investment returns for defined contributions.

“Reforms to defined contribution should enable individuals to benefit from collective investment management, at low cost, and not have their retirement savings hostage to market cycles as much as they are today,” G-30 Chairman and Singapore senior minister Tharman Shanmugaratnam said in a statement.

The report acknowledges that confronting the coming crisis will be difficult because it will involve potentially politically unpopular decisions.

Making it “even more arduous is that it occurs at a time when governmental institutions are increasingly mistrusted, mainstream political parties are under strain,” and voters are becoming more diverse as well as “susceptible to populist rhetoric and demagoguery,” the G-30 said.