Young workers must save more to fund their retirement because governments cannot sustain paying for public pensions, says a report from the International Monetary Federation.
The IMF argues that state pensions are a vital safety net that provide an income in retirement and reduce poverty among the old.
But an aging population has seen the cost of providing state pensions soar from an average 1% of GDP in 1970 to nearer 10% now.
The IMF points out that an aging population places an unfair financial burden on younger workers who pay taxes to fund state pensions.
To cope with funding pensions, most governments have policies to reduce the amount paid as pensions.
Saving relies on good luck
Between now and 2060, the average pension value will drop by almost half, says the IMF, leaving younger workers with the prospect of working until they are older and saving more to make up the shortfall from state pensions.
“Simulations suggest that if those born between 1990 and 2009 put aside about 6% of their earnings each year, they would close half of the gap in economic replacement rate relative to today’s retirees,” says the IMF report.
“In practice, relying on people’s private savings for retirement requires a hard-to-achieve mix of fortune and savvy. First, individuals need continuous and stable earnings over their careers to be able to save sufficient amounts.
“Second, workers would have to be able to decide how much to put aside each year and how to invest their savings. Third, the risks from uncertain or low returns are borne by individuals. Finally, workers would have to decide how fast to consume their savings during retirement. These are all complex decisions, and people can make mistakes at each step along the way.”
How governments can help
The IMF also explains that governments can help young retirement savers by helping them to save.
“Governments can make it easier for individuals to remain in the workforce at older ages by reviewing taxes and benefits that might favor early retirement. Nudges to encourage workers to save can also help, for example by automatically enrolling them in private retirement saving plans,” says the report.
“The good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later. But they must start now.”
