How longer life expectancy is becoming a financial issue
Since the end of the 19th century, there has been a steady rise in life expectancy in Europe, the USA, Japan and China. For example, the average life expectancy in Europe, between 1770 and 2015, has increased from 30-40 to 60-80 years, according to a UN study.
Rising longevity, combined with a decrease in the birth rates in recent decades, has led many countries to the phenomenon of “aging” population. “Aging of the nation” essentially means, that there is a rapid increase in the proportion of citizens over 65 to those in between 18 and 25. This demographic shift is becoming a burning issue in the United States. For example, in the 1850s, only 5% of the population was over the age of 65. Now this figure exceeds 15% and is showing no signs of stopping (Office for National Statistics, 2003).
By 2025, one in every six people on Earth will be over the age of 60, according to the UN. That is more than one billion people. If expectancy continues to grow at this rate, a child born in 2007 will have more than a 50% chance of living past the age of 107.
According to a report done by the International Monetary Fund (IMF), increasing the life expectancy of people also increases individual well-being. At the same time, this rising longevity leads to higher financial costs:
- for governments, in the form of employee retirement plans and social security programs;
- for corporations, that are required to provide pension plans with a defined benefit size;
- for individuals, who may not have access to guaranteed pension benefits.
It would be in the best interest of corporations, as well as governments, to address this issue as soon as possible. Eventually, the financial costs of the increase of the elderly population will be impossible to ignore. Fortunately, if effective measures are taken now, and proper regulations are put into place, positive results could be seen in just a few years.
At this current pace of longevity growth and given the average level of savings in advanced economies, many people currently in their mid-40s are likely to need to work into their early to mid-70s. It’s expected that many people currently in their 20s (many of whom probably will not live to be over 100) will be working well into their late 80s.
The corporate angle
An MIT Sloan Management Review recently published a research study that explores the corporate implication of prolonged life expectancy. According to the results, corporations are going to have a lot to consider in the upcoming years. On one hand, many executives are excited about the estimated $15 trillion of spending power of people in their 60’s. On the other hand, few corporate as well as government leaders have taken any decisive actions on the matter of the ever increasing elderly population. To clearly represent the opportunities and challenges that longevity will bring to the workplace, we’ve laid out a few facts below.
“It is generally accepted that the tendency towards the aging of the population goes hand in hand with the economic downturn,” says Hans Timmer, the World Bank’s chief economist for Europe and Central Asia. “However, the presence of a smaller number of young people will significantly improve the quality of education, which ultimately leads to a strong increase in labor productivity.” In addition, with age, people’s skills can vary, but this does not necessarily mean a decrease in productivity.
Middle Age and Older Workers Made Remarkable Changes in their Participation in the Work Force
Workforce participation rates of U.S. women and men, 1950- 2010, projected 2020-2030
The report “Golden Aging: Prospects for Healthy, Active and Prosperous Aging” indicates that employers can take advantage of these changes. To ensure a successful transition concerning the change in the age of the workforce, it is necessary to create favorable conditions, including the creation of the right incentives and proper policies, both from the government and corporations.
The financial angle
A new study by US Federal Reserve economists, published in October, asserts that employment is below optimal and inflation is below targets. This is due to underestimation of the impact of this demographic shift. Another negative effect of rising longevity will be how central banks will be deprived of the opportunity to seek higher long-term interest rates.
Longer Work Lives Reduce Economic Challenges of an Aging Population
Stanley Fischer, deputy chairman of the Federal Reserve, said that the aging of the population, along with other factors, will not allow an increase of the refinancing rate in the US. The Federal Reserve claims that since 1980, the demographic factor has reduced the nation’s gross national product by 1.25%. Economists from the Federal Reserve warn that the effect of these demographic factors could be permanent. This means that interest rates and profitability are going to see a sharp decrease.
Individual Working Opportunities
In response to the pressures resulting from longer working lives, individuals are starting to experiment with new stages of life and creating different career structures. One of the first age groups to test traditional corporate policies are those currently in their 60s. The idea of a retirement at age 65 is no longer viable, as they are beginning to look for ways to be productive longer.
Currently, one in five Americans over the age of 65 (and one in 12 over 75) still works. An increasingly popular option is to become an entrepreneur. People starting a business today in the United States, are more likely to be over 55 than under 34. People in their mid-40s face a realization that they could have another 30 years of work ahead of them. The generation just entering the workforce has the longest expected lifespan (10 to 15 years more) in history.
In contrast to previous generations, younger workers are beginning to contradict traditional markers of full adult independence and commitment (such as getting married, having children, and buying a home). In addition, many in this group are embracing a new form of entrepreneurship that combines work and leisure, and includes a focus on learning new skills.
Increasing longevity in developed countries during the 20th century led to the emergence of two stages that had not been previously recognized: the teenage years and retirement. It follows that longevity gains may lead to the development of further additional stages. Rather than a three-stage life, we expect to see a multistage life, along with a larger number of transitions. This will require individuals to add new life stages that prioritize developing intangible assets.
In a multistage life, personal assets that enable productivity and career transformations are as essential as financial assets. The challenge for longer working lives is how to build and maintain intangible assets over a career of 50 or 60 years. By the end of a traditional three-stage 40-year career, the skills and knowledge built at the beginning. With advances in artificial intelligence, it’s hard to imagine skills and knowledge lasting multiple decades.
For both – workers and enterprises this means prioritizing activities, tasks and learning new skills. Those starting their careers may later want to have time out of the workforce to explore, or to move later into a company after a period of self-employment. Those in their 40s may need to take time out of the workforce to make significant investments in learning new skills to maintain momentum, and those who don’t plan to (or don’t want to) stop working at 65 will want to develop a portfolio of options.
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