The View from the Half-Century Mark

Yesterday, on the 4^th of August, Barack Hussein Obama II – the 44^th President of the United States – turned 50 years old.

Beyond his own accomplishments, however, it was a remarkable achievement for society. 

Human life expectancy has averaged around 40 years for centuries and only began to increase significantly in the 19th century. It has been on an upward trajectory ever since (see chart below).

A hundred years ago, President Obama would have had perhaps another decade to look forward to and with luck, he might just have been able to enjoy that hard-earned pension for a precious few years. Today, he has almost half his life ahead of him and will likely spend a third of his entire life in retirement. 

It’s a notable and staggering achievement, and one we should be proud of. But there is a darker side to all of this – the cost of providing pensions for all of us as we get older, and that’s before we even begin to consider other areas such as healthcare and long-term care. 

Governments, businesses and individuals all have to prepare for the economic, societal and financial implications of an ageing society – something we have discussed but also ignored for too long. In the UK alone, it has been estimated that pension liabilities increase by 3% or more for every added year of life expectancy. 

One of the tragedies of the Great Recession or whatever you want to call the last few years, has been that we have all been so focused on the ‘urgent’ today that we have completely forgotten about the far more important tomorrow.   

Human myopia dictates that there will always be a bias but the consequences of this ostrich mentality are far reaching, even in the current sovereign panic. As the baby boomers come up for retirement, both here in the UK and in the US, it will put enormous pressures on an already strained public balance sheet. In the US, it means pressure on areas such as social security, Medicare, and long-term care.   

Once you start including all these off-balance sheet items, the numbers are scary. In many ways, the current swathe of debt-to-GDP ratios for countries are almost ‘reassuring’ as they tell us many are still well below 100% and not past the point of no return. 

But the official ratio only takes into account the on-balance sheet debt. When you start taking into account public sector liabilities, pension obligations, and so forth, the actual ratios no longer look reassuring.  In the US, for example, total net liabilities are north of 500% of GDP.  The UK is marginally better off at c. 400%. That implies that we are facing a very real solvency crisis in the developed world. 

There is a personal tragedy as well. As people reach retirement age, they are increasing looking at their pensions and the payments they can rely on, and the reality is painful. This isn’t about the difference between living in poverty and avoiding poverty. It’s about what people think of as an adequate standard of living, and many are finding that they cannot maintain that unless they continue working past what was traditionally their retirement age. In the future, we will all be likely working for longer and retirement will increasingly become an aspiration. 

Ironically, the US has lessons in the past to learn from. We have talked elsewhere about the detail of the American Civil War Veterans pension scheme, one of the earliest defined benefit schemes.  But it’s worth noting that payments for the scheme grew so large that at one point in the 1890s, it used to make up over 40% of the US budget. As they all died, payments came down as there were no others to replace them (barring a surge in marriages to impoverished young ladies in the Great Depression that extended the life of the scheme to this century). 

Today, however, neither the US nor the rest of the developed world has that luxury. As generation upon generation continues to live longer, the strains on our social fabric continue to grow in the absence of solutions. 

If nothing changes, the US can expect to pay an additional 8% of GDP to age related expenditure by 2050 as President Obama – by then long-retired – hits 89 years of age and his successors promise to outlast even that venerable age. In today’s terms, that is another $1.1 trillion a year in additional costs for the US.

Where will the money for all their pensions come from?