June 12, 2018
It used to be that workers retired around age 65, and then lived off of pensions, savings and family support. But now that people are healthier and living longer, retiring in their mid-60s is no longer as attractive. Many people plan to work well into their 60s and 70s, not simply because they want to, but more likely due to financial need.
Mercer’s recent study, Healthy, Wealthy and Work-Wise: The New Imperatives for Financial Security, looked at the forces that impact financial security and beliefs about retirement. The 12-country study surveyed 7,000 adults across six age groups, as well as 600 senior executives in business and government. More than two-thirds (68%) of the respondents in the study said that they expect to keep working past a traditional retirement age.
Today, the way that people work and ‘retire’ has fundamentally changed. Employers and workers need to adapt. This is especially true in growth markets like Asia and Latin America, which are rapidly expanding and the growing middle class are optimistic about the future. However, they need the tools to make sure they can maintain their newfound, higher quality of life in later years.
As these aging populations face urbanized economies, this will also have an impact on the multi-generations of workers and family structures. For instance, in China, where younger generations traditionally support older generations, and with 60% of the Chinese population expected to be in an urban city by 2030, urbanization will shape the physical and cultural fabrics of this thriving country. Chinese families now face dramatically higher housing, transportation, and food prices, not to mention increasingly limited workforce mobility.
Latin America is also one of the world’s most urbanized regions (in comparison, the European Union is 74% urbanized; the East Asia and Pacific region is 50%). By 2050, UN-Habitat predicts Latin America’s cities will include 90% of the region’s population. Latin America, like China, has traditionally had a very family-based culture, so urbanization could also strain family structures and workforce mobility1.
Today, on average globally, people expect to spend 15-20 years in retirement. Without better planning, many will either outlive their savings or have to reduce their expected quality of life. These realities will become more acute in many growth economies, where employer sponsored retirement benefits are often immature and government pension systems are threatened by sustainability. The number of working people to retirees will drop dramatically over the next 20 years, globally falling from 1:8 today to 1:4 by 20502.
Countries like Chile, China and Brazil will actually halve to 1:2. This puts extraordinary strain on social systems. The strain increases with the high proportion of informal workers in most growth countries. Informal workers can comprise up to 50% of the workforce in some countries. These workers may be unlikely to contribute to or benefit from social security and aged pension systems. In addition to the individual implications, this can also have profound macro-economic implications.3
The proportion of pension spend relative to GDP is also rising in growth markets. Combined with an aging population, the sustainability of government pension systems is even lower. For instance, Italy, Greece and the Ukraine have among the highest percentages of pension spend at around 16% of GDP, and these were around 10% in 2000, which highlights how rapidly pension spend is growing. Many other European countries have considerably high percentages (>11% of GDP), including Portugal, France, Austria, Slovenia, Spain, and Finland. For context, the U.S. public pension spend is currently 7% of GDP, while Japan and Hungary are 10% of GDP.4
With societies rapidly aging, organizations will need to be far more flexible in providing programs that meet the needs of a wide range of employees – from millennials who typically switch jobs frequently, to informal workers seeking financial stability, to older workers looking to stay healthy so they can work longer and ensure income in their later years. In 2010, the East Asia and Pacific growth regions accounted for 36% of the global population aged over 65 years. Between 2015 and 2034, the older population in East Asia alone is expected to grow by about 22% every five years.5
As we navigate aging and urbanized growth markets, employers need to be prepared for a multi-generational workforce. A large part of the workforce is getting older, and they’re not retiring. Further, as more older workers are increasingly likely to live in urban areas, they have less workforce mobility and industry options, not to mention a higher cost of living that will only rise as urban real estate is claimed by the middle and upper classes. This puts a strain on individuals’ abilities to live well for longer.
Different expectations around work and retirement on the part of employers and employees could help both groups. Older workers have significant experience that could be extremely valuable —employers that figure out how to keep these employees contributing longer may have a competitive advantage.
Opportunities for people to work for an additional decade or two (or three), in different capacities or with adjusted schedules, would mean that people would have many more years where they could contribute to savings and investments. Ideally, a steady savings plan over a longer timeframe could be maintained regardless of how people structure their working lives. It may also provide better retirement outcomes for those who take time out of the workforce, structure their work flexibly or work in the informal economy.
On a policy level, it is time to consider raising or even eliminating set retirement ages. Similarly, many countries need to consider providing incentives for people to work past the traditional retirement age. While some growth economies, Singapore for example, have done this successfully, the number of social pension systems that incentivize people to work longer is still small.
Around the world, respondents in the survey felt that planning for retirement was their own responsibility, and for the most part, were optimistic about being able to save. China, for instance, ranked highest in their optimism for the future. Seventy-percent expect to maintain their quality of life after fully retiring. This may be due to the quickly growing middle class and traditional savings culture. While this savings may not necessarily be earmarked for retirement, saving for the future is a part of the day-to-day lives of many in the country.
On the other hand, Japan, which is the second oldest society in the world,6 has very low financial security, with 72% of survey respondents saying they do not feel financially secure. Only 21% expect to maintain a desired quality of life after fully retiring and only 8% are confident they have saved enough to provide income for retirement. It is not surprising that 78% of respondents are at least somewhat stressed about their financial situation, with the top factors contributing to this stress being personal health, lack of reliance on a state pension, and not saving enough for retirement.
As we face aging societies around the world, not just in Japan, these alarming statistics serve as a warning of the impact a long-term savings gap can have if no action is taken. Although we accept it is our personal responsibility to better prepare for retirement, we are not taking the necessary actions to improve our financial security.
Eighty-five percent of survey respondents were willing to change their current lifestyle, realizing trade-offs - such as saving more or downsizing - were necessary to afford to live longer. 40% were willing to save a greater percentage of disposable income, followed by 32% who were willing to spend less and downsize. 27% were willing to take on part-time work. Respondents were looking for greater guidance regarding the trade-offs they should make.
As later-life financial needs vary, flexibility is vital. People want to choose how long they work. A big role employers play is in rethinking their retirement benefits, especially since workers may want to keep working past the traditional age of retirement. This means, in many cases, employers benefit from the experience and skill sets of older workers — especially in the face of a shrinking talent pool.
Employers have much to gain from helping their employees become more financially fit. Research shows that employees who are not financially healthy have higher levels of stress and distraction, leading to lower productivity, poorer customer service and impaired health.
As a matter of fact, the Mercer study found that 40% of respondents globally reported their financial security caused them stress.
The study also found that 79% of adults trust employers to give sound advice about financial planning. Eighty-six percent of employees said that if their employer improved benefits or added access to an investment plan, it would result in higher job satisfaction and greater commitment to the organization. In short, workers are looking to their employers to help them help themselves.
Worrying about money matters at work places a significant drag on productivity — and could be eliminated if employers helped their employees find appropriate financial tools and information to make smarter financial decisions, including long-term savings options. Beyond the practical gains, employers committed to helping their employees attain financial security is simply the right thing to do.
These tools would be especially effective for Millennials. They are the least financially secure generation in the workforce today. Ninety-three percent are willing to use online tools to help track and manage their financial, health and personal data as long as the tools are easy-to-use and their data is secure. Eighty-tw percent of millennials surveyed said they would save more if they understood the impact of those savings on later years.
Some resources, however, do not hold the same level of interest: 52% of all adults are not comfortable with robo-advisors giving automated advice and feel similarly about call centers with financial advisors. This implies people are looking to be treated individually when it comes to guidance and advice.
Employers need to transform savings into an engaging experience and make it achievable through simplified language, tools, and the ability to track savings and progress in real time. This could create the same explosion in the savings industry as we have seen over the past several decades in the fitness industry – aided by the fitness revolution of the 1970s and 1980s, and current digital tools to track, motivate, and improve performance.
Acting now applies to business and government, and is not solely the responsibility of the individual. The need to adapt long-term savings programs and products to new demographic and economic realities is urgent. The current trajectory could put large numbers of people at risk of poverty, not to mention diminished productivity at work. Applying creative and strategic thinking would transform the future reality for many.
The dynamics of retirement savings need to change to reflect our diverse and modern social systems and work experiences. Financial security should not be the domain of only those with access to employer programs, of one gender over another, or of older generations to the detriment of those that follow. Public and private enterprises must join forces to ensure that financial security is available to everyone, now.
1 UN Habitat, 2012
2 United Nations Population Data, 2017
3 World Bank, 2017
4 OECD, 2015
5 World Bank, 2015
6 Central Intelligence Agency, 2017