The $20 Trillion Retirement Crisis Facing the World

On a Tuesday morning, you can find people who did everything more or less correctly in any Social Security office in a mid-sized American city. These offices typically have worn plastic chairs and a number dispenser by the door. They were productive. They made a payment. They held out. Many of them are now finding that the amount that was saved for them and what was promised to them differ greatly as they sit with their paperwork and meticulous calculations. At scale, that disparity, which is small and intimate at the individual level, becomes nearly unfathomable.

The current global shortfall in retirement savings is estimated by the World Economic Forum to be around $70 trillion, and estimates indicate that it could rise to $400 trillion by 2050. Approximately $28 trillion of that current deficit comes from the United States alone. These numbers are so big that they become unmanageable, which may be one of the reasons why discussions about them tend to remain theoretical and abstract, alternating between policy papers and opinion pieces without ever coming to anything approaching urgency.

Although the structural issue is not new, it has been developing covertly for decades while governments concentrated on more pressing issues. The fundamental math of retirement systems—employees contributing to support retirees withdrawing—depends solely on the ratio between the two groups staying within reasonable bounds. In the majority of developed nations, it did for the majority of the 20th century. Populations then grew older.

The number of births decreased. The average lifespan continued to rise. There are entire rural towns in Japan today where the average resident is over sixty, stores that serve almost exclusively senior citizens, and a working-age population that is simply too small to uphold the promises made to the generation above it. This is because the country experienced the demographic shift earlier and more dramatically than other places. What transpired in Japan is merely a sneak peek; it is not exclusive to Japan.

According to the Heritage Foundation’s analysis of Social Security’s long-term deficit, the inflation-adjusted deficit between now and 2075 will exceed $20 trillion. Over the years, that figure has been updated and revised, but its direction has remained steadfastly constant: it is growing. It is anticipated that well within the lifespan of those in their forties, Social Security will start to pay out more than it takes in. The yearly deficit, which is small in the short run, adds up to something that would necessitate either a 33 percent reduction in benefits or a 54 percent increase in payroll taxes, or a painful combination of both. Because neither choice is politically acceptable, the discussion usually ends there and picks up again a few years later, this time with slightly higher figures.

But it’s important to be honest about how complicated this is. Some researchers, like Andrew Biggs of the American Enterprise Institute, spend a lot of time pointing out that many retirement crisis projections have underlying assumptions that make the results appear worse than they actually are. More than 40% of near-retirees would find it difficult to replace half of their pre-retirement income, according to a widely cited 2002 study. Less than 10% of those individuals had found themselves in that predicament when researchers reexamined the results using IRS and investment data.

It turned out that the methodology had only assumed that employees with 401(k)s would cease making contributions as soon as they turned 47 and would not even receive interest on the money they had already saved. It’s similar to calculating the distance to a destination without taking into consideration the fact that you’re still walking. It turns out that real people continue to contribute. The markets continue to compound. Social Security benefits continue to come in. The picture isn’t as clear-cut as the literature on crises frequently implies.

And yet. The overall figures are still concerning, and the individuals who slip through the cracks are real and numerous; they are not statistical anomalies. Roughly 60% of American households have no savings in retirement accounts, according to data from the US Government Accountability Office. Not underfunded. Not one. Social Security is not a supplement but rather the only thing keeping half of the families within ten years of retirement age out of poverty because half of them have no defined-contribution savings and a third have neither a DC plan nor a traditional pension.

Although the Census Bureau’s senior poverty statistics are better than many forecasts had predicted, millions of older Americans still live below the poverty line—people who worked, frequently in physically demanding jobs, and found their safety net to be thinner than advertised when they reached the end of their working lives.

Particularly undervalued is the gender component of all of this. The pension gap between men and women is estimated to be as high as 30 to 40 percent because women continue to earn less than men on average, with the income gap ranging from 10 to 20 percent depending on the measure, and because women typically live longer. When a woman retires with less money saved and must spread out her Social Security benefits over a longer period of time than her male counterpart, the math works against her in several ways at once. Observing the policy discussions surrounding retirement reform gives the impression that this specific aspect of the crisis gets far less attention than it merits.

Governments are starting to recognize that something has to change, at least in theory. Most economists consider the pool of retirement assets created by Australia’s mandatory superannuation system, which requires workers to save a portion of their earnings throughout their careers, to be a true success. Hundreds of thousands of uninsured workers in New Zealand are now part of a retirement savings system thanks to KiwiSaver.

Auto-enrollment is now the standard for workplace pensions in the UK. These are genuine reforms, flawed but significant. Getting people into systems where compounding can benefit them instead of leaving savings as a voluntary choice that is always postponed is what unites them. It should come as no surprise that the World Economic Forum’s research on this topic has found that increasing access will reduce the gap more than slightly increasing returns for those who are already saving.

However, the truth is that no reform will be sufficient on its own. As lifespans increase, retirement ages will probably need to rise gradually. This is an uncomfortable political reality that most nations’ leaders have been reluctant to publicly acknowledge. It is likely that benefit structures will need to be adjusted. Gaps that cannot be filled by public systems will need to be filled by private savings. The $400 trillion estimate for 2050 might actually be a worst-case scenario rather than an absolute. However, the trajectory is obvious, the demographic math will not change on its own, and every year that the discussion remains theoretical, the window for gradual, manageable reform gets smaller.