FIXING THE PENSIONS CRISIS Ensuring Lifetime Financial Security Disclaimer This report is the product of the Group of Thirty’s Steering Committee and Working Group on Pensions and reflects broad agreement among its participants. This does not imply agreement with every specific observation or nuance. Members participated in their personal capacity, and their participation does not imply the support or agreement of their respective public or private institutions. The report does not represent the views of the membership of the Group of Thirty as a whole. ISBN 1-56708-177-0 Copies of this paper are available for US$25 from: The Group of Thirty 1701 K Street, N.W., Suite 950 Washington, D.C. 20006 Tel.: (202) 331-2472 E-mail: [email protected], www.group30.org FIXING THE PENSIONS CRISIS Ensuring Lifetime Financial Security Published by Group of Thirty • Washington, D.C. • November 2019 GROUP OF THIRTY Table of Contents vii Foreword 47 SECTION 5 Policy and Industry Responses ix Acknowledgments for Successful Lifetime Financial Security xi Working Group Conclusion xiii Abbreviations 65 APPENDIX 1 xv Executive Summary 67 Comparative Taxonomies 1 Introduction 69 APPENDIX 2 5 SECTION 1 Sweden’s Notional DC system A Conceptual Framework of Lifetime Financial 70 APPENDIX 3 Security Provision Modeling Lifetime Financial Security Trends 11 SECTION 2 The Economics of Lifetime 77 Bibliography Financial Security 80 Group of Thirty Members 2019 25 SECTION 3 84 Group of Thirty Publications Demographic, Economic, Since 2000 and Policy Trends 41 SECTION 4 A Brief Survey of Lifetime Financial Security System Designs FIGURES 2 Figure I1.1 Scope of Lifetime 14 Figure 2.2 Sensitivity 21 Figure 2.6 Central Financial Security of dependency ratio to government debt (% GDP) retirement age, Europe, 2015 5 Figure 1.1 Conceptual 26 Figure 3.1 Life expectancy at framework of a Lifetime 15 Figure 2.3 Dependency birth for selected countries Financial Security System ratio revisited for the and regions, 1950–2055 United States, 2015 7 Figure 1.2 Public expenditure 27 Figure 3.2 Fertility rate on pensions, health care, 16 Figure 2.4 Historic for selected countries and and housing (% GDP, 2015) dependency and productivity regions, 1950–2055 trends, Germany, 1950–2015 13 Figure 2.1 Postwar 28 Figure 3.3 65+ dependency dependency ratio, life 16 Figure 2.5 Dependency, ratio for selected countries, expectancy, and fertility productivity, and real 2010–2050 rate, United States and incomes, Japan, 1980–2015 Japan, 1950–2015 FIXING THE PENSIONS CRISIS: ENSURING LIFETIME FINANCIAL SECURITY 29 Figure 3.4 Dependency 34 Figure 3.9 China’s GDP per 40 Figure 3.15 Reduction in ratios for selected countries, capita growth, 2000–2050, LFS gap in 2050 based under “proportional and dependency drag on various policy levers principle,” 2010–2050 34 Figure 3.10 Middle-income 57 Figure 5.1 Allocation of 30 Figure 3.5 Forecasted country GDP per capita assets in funded and private statutory retirement growth, 2000–2050, pension arrangements, 2016 age based on current and dependency drag 68 Figure A1.1 Illustration policies, by country 36 Figure 3.11 Drivers of of taxonomies 32 Figure 3.6 Dependency ratio lifetime financial security 71 Figure A3.1 Illustration of under current and expected 37 Figure 3.12 Average and key model mechanisms average retirement age; range of five “real natural and with the proportional 74 Figure A3.2 Stylized rate of interest” estimates principle applied from example of LFS demand for the United States 2010 for the United States, and supply building blocks the UK, and Japan 37 Figure 3.13 Historical return for 20-year Treasury 33 Figure 3.7. Japan’s GDP per Inflation-Indexed Security capita growth, 2000–2050, and dependency drag 38 Figure 3.14 Projected global lifetime financial 33 Figure 3.8 Developed security gap, 2000–2050 country GDP per capita growth, 2000–2050, and dependency drag TABLES 6 Table 1.1 G30 taxonomy 45 Table 4.1 Pension pillar 72 Table A3.2 Forecasted of a Lifetime Financial structures and characteristics increase in health care Security system spending as % of GDP 49 Table 5.1 Required increases 20 Table 2.1 Two types in retirement age under 73 Table A3.3 Government of longevity risk the proportional principle spending on pension (in line with higher life 30 Table 3.1 Different types 74 Table A3.4 Assumed expectancy) in 2050 of policies to encourage rate of return by income private saving 71 Table A3.1 Average annual group and asset class real wage growth rates, 39 Table 3.2 Assumed rate 75 Table A3.5 Summary of LFS 2000–2016 of return by income projection assumptions group and asset class WINDOWS 8 Window 1.1 Migration and LFS 21 Window 2.5 Is there a 54 Window 5.2 Shifting problem with debt? burdens and benefits 12 Window 2.1 The significance of closed compared 37 Window 3.1 Low interest 55 Window 5.3 The to open systems rate environment annuity puzzle 12 Window 2.2 The changing 42 Window 4.1 Should 56 Window 5.4 Notional concept of a working life saving be mandated? accounts 14 Window 2.3 The interplay 43 Window 4.2 Universal 59 Window 5.5 Private wealth of longevity and fertility compared to means-tested and the housing conundrum in increasing population benefits 63 Window 5.6 Case Study: dependency 51 Window 5.1 Engaging more How Denmark carried 17 Window 2.4 The female capacity and talent out pension reforms relationship between aging and productivity GROUP OF THIRTY Foreword The Group of Thirty (G30) aims to deepen under- that are without significant adjustments to be made standing of international economic and financial by workers, retirees, employers, and governments, if issues, and to explore the international repercussions we are to close the gap between expected retirement of decisions taken in the public and private sectors. income and projected resources. The G30 is characterized by its knowledge of the past The report underscores the need for honest rec- and broad-minded, forward thinking. ognition of these challenges, and of the need for This report, Fixing the Pensions Crisis: Ensuring adjustments to achieve lifetime financial security goals Lifetime Financial Security, continues the G30’s and preserve inclusivity. The changes will not be easy. 40-year history of considered, evidence-based, action- The distribution of burdens and obligations among able study. The report lays out the shared challenges different groups in society, and between today’s and societies face as they seek to reform and strengthen tomorrow’s generations, must be a major issue of pension systems to ensure they are sustainable and up political debate and consensus building. It cannot be to the task of providing lifetime financial security in postponed indefinitely. response to demographic shifts, slower growth, and We hope that the report’s policy recommenda- diminished long-term expected returns on pension tions, when taken together and considered within the fund investments. context of national economies and pension systems, The report’s analysis is sobering. It makes clear will support the necessary debate on how we can best there are no simple fixes to pension systems, no options provide lifetime financial security going forward. Jacob A. Frenkel Tharman Shanmugaratnam Chairman, Board of Trustees Chairman Group of Thirty Group of Thirty vii GROUP OF THIRTY Acknowledgments On behalf of the Group of Thirty (G30), I would The G30 extends its deep appreciation to Project like to express our appreciation to those whose time, Director Colin Brereton, Adviser Miles Kennedy, and talent, and energy have driven this project to a suc- the team at PwC including Nick Forest and Jinny cessful completion. Park, for their tireless work and contributions to the I would like to thank the members of the Steering analysis and formulation of the report and their com- Committee and Working Group of this project, who mitment to the project. guided our collective work at every stage and added The coordination of this project and many aspects their unique insight and inputs. The intellect and expe- of project management, Working Group logistics, and rience brought to the table by the nine members of report production were centered at the G30 offices in the Steering Committee and Working Group on the Washington, D.C. This project could not have been important subject of Lifetime Financial Security and completed without the efforts of our editor, Diane the challenges that confront policy makers, workers, Stamm, and the work of Executive Director Stuart retirees, and societies in the future were critical to the Mackintosh and his team, including Desiree Maruca report’s proposals. and Peter Bruno of the G30. We are grateful to them all. Adair Turner Chair, Working Group on Pension Funds ix GROUP OF THIRTY Working Group Steering Committee Adair Turner, Chair Senior Fellow, Institute for New Economic Thinking Former Chairman, Financial Services Authority Gerd Häusler Member of the Supervisory Board, Munich Reinsurance Former Financial Counsellor and Director, International Monetary Fund Tharman Shanmugaratnam Chairman, Group of Thirty Senior Minister and Coordinating Minister for Social Policies, Singapore Working Group Members Jaime Caruana Philipp Hildebrand Member of the Board of Directors, BBVA Vice Chairman, BlackRock Former Financial Counsellor, International Former Chairman of the Governing Board, Monetary Fund Swiss National Bank Guillermo de la Dehesa Masaaki Shirakawa Vice Chairman and Member of the Executive Distinguished Guest Professor of International Committee,