Posted Wednesday, April 11, 2012, at 12:30 PM
The International Monetary Fund has warned that life expectancy may rise faster than governments and financial institutions are forecasting, posing a risk to financial stability.
Photo by JUNG YEON-JE/AFP/Getty Images
Underestimate the elderly at your peril is the warning from the International Monetary Fund. Statisticians and economists may be downplaying the lengthening of the human lifespan. If they’re doing so by the same three years as in recent decades, the IMF reckons the cost of pensions and healthcare will be 50 percent higher than estimated. Something, almost certainly the age of retirement, will have to give.
Demographers keep expecting a slowdown in rising life expectancies that has yet to occur. In 1977 the British government was being guided by actuaries who predicted its citizens would be living to 71 on average by 2011. In fact, they now typically make it to 79. Estimates by rich-nation statisticians have generally fallen shy of actual life spans by around three years over the past several decades. Yet the number crunchers continue to forecast a stalling of the longevity escalator.
This could prove an expensive blunder. Even under the current cautious lifespan assumptions, the cost of providing a reasonable retirement - replacing around 60 percent of pre-retirement income - will double over the coming 40 years globally, the IMF calculates. Supporting armies of silver-haired citizens in rich nations, the fund believes, will gobble up 11 percent of GDP by 2050, up from 5 percent now. Most states have done precious little to prepare even for this. But assume current life forecasts are short by three years again, and the cumulative price tag rises by half again at mid-century.
Facing up to the threat might be unpleasant. The pension liabilities of the Netherlands jumped by 50 billion euros - or 7 percent of GDP - at a stroke in 2010 when the country decided to take account of even modest expected increases in lifespan. Such moves demand chunky injections of cash into private and public pension pots, which would in turn deprive the productive generations needed to support the elderly of much-needed investment in education and infrastructure.
More distress is on the way, however, unless more permanent solutions are found. Tying the retirement age - and benefits - to the escalating life expectancy is the simplest step. A few pioneers, like Denmark and Sweden, have already moved in this direction. Other nations would be wise to follow suit quickly. Delaying will only make the final reckoning more painful.
Read more at Reuters Breakingviews.