Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
in their old-age. Yet, due to global ageing and the shrinking of working populations, tax
revenue may be insufficient to meet pension promises, leading to possible distributional
crises and thus shortages in old-age income. Contributors to a pre-funded pension system
also obtain a claim on future benefits but in a different way. They accumulate financial
assets, mainly bonds and equity, which are later sold to younger workers. A large number
of retirees who want to sell and a low demand for these financial assets can cause asset
prices to fall longer-term, lowering the market value of pension funds and also pension
benefits, especially in the case of defined contribution schemes.
The period of retirement lengthened considerably during the 20th century, especially
after 1960 when the average worker who retired could expect to have 10 or so years
of retirement. Nowadays, this period has extended to 20 years or more (see Figure 2).
Hence, not only individuals face the risk of having a reduced old-age income, but they
also run the risk of being exposed to higher expenses since retirement periods are longer.
This means that they should save even more for their retirement. However, many people
fail to do so. They may lack the financial literacy necessary to plan ahead properly
and the awareness of their future needs. They may also underestimate the amount they
need to retire safely, often by underestimating their future longevity. They also have
limited financial resources and are prone to myopic behaviour, thus prioritising current
consumption over saving for future needs.
Figure 2: Average life expectancy after pensionable age in the OECD, 1960-2050
26.5
24.5
22.5
20.5
18.5
16.5
14.5
12.5
1958 1971 1983 1989 1993 1999 2002 2010 2020 2030 2040
Source: OECD (2011a).
In addition, rising health care costs influence old-age income. Health spending is more
and more correlated with age. As mentioned earlier, older people in general are reporting
a greater number of chronic conditions and disability. Per capita health care costs of the
retired are considerably higher than for the working age population (see OECD, 2011b).
However there is a difference between increasing expenditure (which relates to the real
increase of value added) and cost inflation. It is important to distinguish clearly between
the two different mechanisms. One is health cost inflation, i.e. when the same treatment
Men
Women