The Future of Saving: The Role of Pension System Design in an Aging World an International Monetary Fund report published in 2019 has some interesting views and is worth a read by those who are interested in how we as global citizens are dealing with an ageing population. The purpose of the reports is to showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. So here are some of the conclusions reached.
Ageing challenge and saving.
Ageing populations will have important consequences for the evolution of saving rates across countries. Under current policies, public pension outlays in advanced and emerging market economies will increase by an average of 1 to 2½ percentage points of GDP, respectively, by 2050, depressing public saving.
The impact on private and aggregate saving depends on, coverage, benefits promised to the elderly, and when they would start receiving those transfers. Thus, the appropriate responses to the ageing challenge will vary across countries and will have to account for country-specific policy and institutional settings, including how pensions are determined and financed.
For instance, in countries with relatively high saving rates and inadequate social security systems, increasing generosity may be warranted. In rapidly ageing countries with relatively low saving rates and rising pension liabilities, the challenge will be to increase saving ratios in a sustainable way. For today’s younger generations in many countries, saving more for the future will become increasingly important to ensure retirement income security.
Public pension system reforms.
Overly generous pension benefits (owing to high benefit ratios or low statutory retirement age) can interact with projected demographic trends to lower aggregate saving. Reducing public pension generosity (for example, curtailing early retirement benefits or reducing benefit ratios) could attenuate long-term fiscal vulnerabilities and moderate the fall in aggregate saving.
To counter these trends, today’s workers will need to prepare for the future by saving more and extending their work lives. In advanced economies where pensions have been largely reformed, for those born between 1990 and 2009, simulations suggest that increasing the retirement age by five years (from today’s average of 63 to 68 in 2050) would close half the projected gap in benefit ratios relative to today’s retirees.
If members of the same years were to put aside an additional 6 percent of their earnings each year, they would close the other half of the gap in the benefit ratio. Financial sector and labour market policies could support such behavioural changes.
Balancing sustainability and equity considerations.
The distributional consequences of pension system reform can be significant. While ongoing and planned reforms will improve pension system sustainability, average benefit ratios are projected to decline sharply in many countries. Thus, additional pension system reforms would need to be carefully calibrated to avoid undercutting the welfare of future retirees and fueling poverty among the elderly.
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