What would happen if death took a vacation?
That´s what Portuguese author Jose Saramago explores in his 2005 novel Death with Interruptions.
It all starts one New Year’s Day.
In those first 24 hours of the year, no one dies…or the next day…or the day after.
Soon, there are rumors…there have been no deaths. And, as the days passed, those rumors got confirmed.
Death had mysteriously disappeared.
People were ecstatic. They had somehow achieved something no one else ever had before, immortality.
Life was beautiful.
There was no more fear of death. The old adage ‘nothing is certain but death and taxes’ no longer applied.
But, euphoria soon faded, as people started to realise the implications of what the new reality meant.
The first ones to realise it were funerary homes. Overnight, their centuries old business had become obsolete.
Then, there were the hospitals. They were running out of space.
You see, eternal living didn´t mean youth and health. The terminally ill people didn’t get better or worse, they stayed the same. People in bad accidents were coming out of wreckages alive, even if they shouldn´t be, by the way they looked.
And then there was the pension problem.
If the inactive population kept growing and the active percentage of the population kept shrinking, how could the government honour their pension promises? It would take the state into bankruptcy to do so.
The miracle of immortality had turned into the country’s worst nightmare. It would flip the population pyramid on its head, with an increasingly ageing population that would consume younger generations.
Can life exist without death? That’s what Saramago contemplates in his essay. If you have never read any of his works, I highly recommend you do if you get the chance.
In our current society, we haven’t yet reached immortality…but we are living longer. Death hasn’t taken a vacation, but it has become lethargic.
Ageing population a strain on the pension system
The truth is that the world’s population is ageing. Our population pyramid’s apex is getting larger, and we are facing similar problems as those described by Saramago.
The typical population pyramid is shifting, as you can see in the graph below.
[Click to enlarge]
The fact is, the percentage of the inactive population is increasing. According to the United Nations, population ageing will be the most significant social transformation in the 21st century.
The current social security system is quite recent.
After the great depression, savings disappeared. Many people were struggling to make ends meet.
That’s when President Franklin Roosevelt signed the Social Security Act in 1935. It provided a safety net for the poor. After the Second World War, baby boomers increased the workforce dramatically.
But now that population is getting older.
According to IndexMundi, the global population´s median age is 42.3. The UN predicts that by 2050, there will be more people aged 60-plus than adolescents and youth aged 10-24 years.
Yet increasing populations and advances in health care also means that retirement money needs to last longer today. Back then, according to Citi, a 65-year-old man was expected to live about 12.7 more years. Today, they could live 20 years longer, that’s a 60% increase.
The graph below shows the world´s increase in population per age group from the year 2000 to 2050. The blue line represents the impressive growth among the 60 or over age group during that period.
Source: United Nations
[Click to enlarge]
The size of the workforce decreasing, and longer life expectancy, makes the current pension system unsustainable. The shrinking workforce has no chance to pay for the promises that have been made on their behalf.
The economics of an ageing Australia
Australia is not immune to this global trend. According to the Australian Institute of Health and Welfare (AIHW), Australia´s median age has increased from 28.5 years in 1964 to 37.3 years in 2014. The number of Australians aged 65-plus has almost doubled since 1964, now accounting for 15% of the total population.
This could mean there are real challenges coming for both pensioners and workers as there is a large retirement savings gap.
Well, according to a World Economic Forum’s white paper:
‘The retirement savings gap in 2015 is estimated to be ~$70 trillion, with the largest shortfall being in the United States. In terms of GDP, this gap represents ~1.5 times the annual GDP across the countries studied. Based on our forward-looking projections, the gap will grow by 5% each year to ~$400 trillion by 2050. This means an additional $28 billion of deficit each day.’
The world’s six largest pension systems will make up US$224 trillion out of the US$400 trillion gap by 2050. That is, the US, the UK, Japan, Netherlands, Canada and Australia.
What are our options?
Well, you can either raise taxes, or cut benefits. Neither one will make people happy…or the government popular.
As you know, governments are already spending a significant amount on pensions. And an ageing population will bring in higher health and social costs, which will mean higher government spending.
Some of the governments are already highly in debt.
The diminishing workforce, longer life expectation and pressure on the pension system are a recipe for disaster.
Editor, Markets & Money