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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Mercer

 

Press Release 29 November 2012

Many National pension systems will be stressed as 'working age' populations shrink by 2020

http://www.mercer.com/press-releases/1493015

 

 

The economically vital 15-64 age group is set to drop by as much as 6% as a percentage of total population in some nations in the next eight years, highlighting the pressure on unfunded national pension systems, says Mercer.

 

Hong Kong faces the biggest decline in this age group from 76% of total population today to 70% in 2020. Canada, Japan and Russia are major economies in which the working age population as a percent of total population is expected to decline by 4%. China, the United Kingdom and the United States are expected to see a 2% decline.

 

By contrast, in some major growth economies the working age population will grow as a percentage of total population over the next eight years. These include Pakistan, which is expected to see a 3% growth, and 2% growth is projected in Brazil, India, Indonesia, Malaysia and Mexico.

 

 According to Dr Deborah Cooper, Partner in Mercer’s retirement business, “While the changes seem small in percentage terms, one must remember that this is a dramatic demographic shift over the next eight years, represents hundreds of millions of workers, and can have a major impact on state pension systems. Most national retirement schemes are state funded and start paying pensions from around age 65, so a contraction in the numbers of the most economically active group will see a reduction in funds available for welfare, health and retirement programmes. Concurrently, the 65+ group in a country might be increasing, drawing on a greater proportion of scarcer financial resources from the smaller working population.”

 

Many Governments have reacted to their ageing populations by a mixture of increasing the minimum payment age for the state pension and reducing the pension paid. According to Mercer, companies, already coping with the impact of demographic change in their own retirement plans, will be expected by employees in many countries to fill the gap in health and retirement benefits as the nation state retreats. 

 

“To do this effectively, we believe that companies and employees need to revisit fundamental beliefs on how to prepare for and structure retirement,” said Dr Cooper. “Governments are already moving in this area by removing default retirement ages or adjusting normal retirement ages.  At Mercer, we are seeing movement on the corporate front, too. More clients are asking us to investigate phasing out traditional pillars of retirement like fixed pension benefits. Instead, they are interested in implementing new types of scheme design, like the workplace savings products in the UK.”

 

According to Dr Cooper, “If you look beyond the overall percentage of the population that is “working age”, there can be offsetting positive factors. If the proportion of those of working age who are in employment, or actively seeking employment, has increased, it will help mitigate the problem. Also, recently, the steady reduction in the age at which people leave employment due to age has slowed, and even reversed in some countries. It suggests that individuals are beginning to react to the increasing cost of retirement at existing ages.”  

 

In the UK, the implications of demographic change can be best illustrated by the 2012 edition of the Melbourne Mercer Global Pension Index. The Index highlighted that the UK was lagging behind other countries on the ‘sustainability’ of its pension system with a score of 46.5 against an average of 52.1. In 2009, when the index first launched, the UK held a sustainability score of 56.4. This ‘sustainability’ section tracks the sustainability of arrangements against issues like old age dependency, state pension age, the opportunity for phased retirement and the labour force participation rates of older workers. The index implies that, whilst the UK government is taking steps to reduce the cost of the state pension, delays in implementing auto enrolment make it less clear how adequate retirement incomes will be provided to individuals who aren’t already in employer sponsored pension schemes, or making their own provision.   Only about 50% of the workforce in the UK is a member of an employer sponsored pension scheme and there is a risk that the system will fail the other 50%, since continuing demographic change will make it hard for the (sometimes self) excluded group to catch up.

 

“Emerging economies face their own challenges,” concluded Fergal McGuinness, senior partner in Mercer’s retirement business. “Will their populations get old before they get rich?  Will they follow the developed world down the dangerous path of unsustainable social security systems? China, in particular, will be interesting to watch, as their ‘one child’ policy has accelerated the aging phenomenon there.  Certainly the high saving rates amongst the Chinese population at large point to concerns about the security of both state and company offered provision.”

 

“Demographic change will also have implications on costs associated with healthcare,” concluded Mr McGuinness, “and throws up interesting workforce planning challenges.  An older workforce also means an aging clientele.  Will an older sales force relate better to the retail customers of the future?  Certain industries are already facing talent shortages for key skills due to the retirement of seasoned professionals.  Strategies that include mentoring the younger cadre and allowing greater flexibility during the transition to retirement can make a material difference to the bottom line for affected organisations.“

 

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Notes for editors
The data comes from the International Labour Organisation from their LABORSTA database and has been published by Mercer to highlight the impact and scale of changing demographics. The 15-64 age group is important - a reduction in this demographic group potentially causes financial problems for states and businesses, most obviously, but by no means exclusively, by reducing the amount of income that is available to fund pension provision.  The data, which is past, current and predictive, covers 2007, 2012 and 2020 and was published in Mercer’s HR Factbook. The data outlines the percentage of a country’s population that falls into one of three age ranges: 0-14, 15-65 and 65+.

 

 

The ‘15-65 age group’ is used here as it includes the portion of the population that is most economically active. However, we acknowledge that there are many variables impacting on this generalisation; for instance, some outside this age group will be participating in the labour market and that others within this age group will not be employed or even eligible for employment.

 

 

Please contact the Press Office for Data Tables.

 

 

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