An IMF analysis says advanced economies would need to set aside half of their GDP today to pay for a three-year increase in longevity that is actuarially likely by 2050. While aging occurs slowly and imperceptibly, its financial effects can be catastrophic if not addressed now, the IMF’s Global Financial Stability Report argues.
The report written by IMF economist S. Erik Oppers says that government liability for social security systems is based on estimates of fertility and longevity. Over the past several decades, governments have consistently underestimated longevity projections and thus have underestimated their pension liabilities. If people live just three years more than expected in 2050, which is in line with the average underestimates of the recent past, the funding gap to pay retirement benefits would be 1% to 2% per year—an amount equal to 50% of 2010 GDP.
This gain in longevity will come as a huge shock to public and private pension schemes that are already woefully underfunded. The problem of ameliorating old-age poverty, the report says, should therefore be addressed today while the remedy will be easier to endure than the bitter medicine that would be needed 40 years hence.
The IMF report recommends “risk sharing between businesses, the government and individuals” as a means of dealing with the problem. People have spontaneously been extending their working years as their awareness of their longevity has grown, but the report suggests that governments should mandate higher retirement ages for pension purposes and corporations should commensurately raise their standards for the number of years workers remain employed.