Originally from our sister publication, InvestmentReview.com.
The International Monetary Fund is warning about the global risk of aging populations in its April 2012 Global Financial Stability Report. The IMF has chosen to focus on the growing public and private costs of increased longevity as individuals continue to live longer and longer lives.
According to the report, few governments and pension providers recognize the size of the risk longevity poses to global financial stability, a risk the IMF quantifies in stunning terms. For example, individuals who live an extra three years the already large cost of aging could increase by 50%, representing additional cost of 50% of 2010 GDP in advanced economies and an additional 25% of 2010 GDP in emerging economies. The impact on pension plans will be similarly huge—in the U.S. for example, the IMF reports that increased longevity could add some 9% to pension liabilities.
So what should policymakers and plan sponsors do? Start by getting real about the issue: governments must wake up and recognize the threat increased longevity represents to economic growth. At the same time, individuals, governments and pension plans need to find a better way of sharing the risks appropriately—that could mean increased contributions or cuts to benefits.