• President Obama will turn 50 years old today. A hundred years ago, he 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 life in retirement.
• Whilst the rapid rise in life expectancy is an achievement we should be proud of, there are darker implications for the cost of providing pensions, as well as other areas such as healthcare and long-term care. For example, 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.
• As the baby boomers come up for retirement, both here and in the US, it will put enormous pressures on an already strained public balance sheet. In the U.S. , 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.
• We’ve all got these ‘reassuring’ figures about the debt-to-GDP ratio of each country that 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 U.S. , for example, total net liabilities are north of 500% of GDP. The UK is marginally better off at c. 400%. That’s scary and implies that we are facing a very real solvency crisis in the developed world.
• Ironically, the US has lessons in the past to learn from. Payments for the American Civil War Veterans pension scheme grew so large that at one point in the 1890s, it made up over 40% of the US budget. As they grew older and died, the payments shrank, but due to a surge in marriages between elderly veterans and poverty-ridden young ladies in the Great Depression, payments were still being made into the 21st century.
• Today, neither the US nor the rest of the developed world has that luxury. If nothing changes, the US can expect to pay an additional 8% of GDP to age related expenditure by 2050. The last time I checked, that was another $1.1 trillion a year in additional costs for the US. Where will that money come from?
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