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 / Autumn 2007 / Issue 48(originally published by Booz & Company)


How to Be a Demographic Realist

Assumption 5: We accumulate assets while working and spend them during retirement. People tend to invest in equities when younger, then shift toward annuities and other fixed-income instruments as they age. Yet we cannot afford to stop growing our income base too soon. A secure income at 65 is unlikely to compensate for a long decline in relative income over 30 years of retirement. Some of the money we are not drawing on in the early years of retirement still needs to be invested in growth-oriented funds or stocks, particularly if the size of our pension pot at retirement is not adequate.

Assumption 6: During retirement we won’t change residences more than once. The home we live in when we retire may be great for fit, car-driving 60-year-olds, but could become unsuitable later. In many countries, however, there is a dire shortage of housing stock to accommodate the different stages of old age, especially as mobility decreases. Consequently, many older people continue to live in houses that are too big, are too ex-pensive to maintain, and may pose hazards to them.

Assumption 7: The state will provide social and health-care services for us in our later years, allowing our children to inherit a significant portion of our estate. The shift in demographic ratios will make public social and health-care services extremely expensive. By 2050, the U.S. will have 2.6 people of working age for each person over 65. In the U.K., there will be only 2.2 people of working age for each retiree, compared with 5.2 in 1950. As a result, governments will be forced to reduce their commitments by insisting on the use of personal assets to pay for care before help from taxpayers is invoked.

As we have seen, many of the individual and collective assumptions about work and retirement are no longer valid. For a couple who reach the age of 65, there is a 50 percent chance one of them will survive to the age of 90, and a 17 percent chance that one will reach 100. We must recognize that long lives are no longer unusual and plan for such a future.

For the individual, that means saving more and not fully counting on state care, corporate pensions, or inheriting a parent’s estate in its entirety. We also must be prepared to work longer, to keep learning, and to be flexible. This may involve giving up a senior position for a less demanding one, or deferring all or part of one’s pension in order to tap better retirement income later on when the need for it is greater.

For this to occur, however, organizations must change as well. Leadership models need to be reconfigured so that management responsibilities can be transferred to younger staff. New advisory or client-facing roles could be created for senior managers so firms can continue to benefit from older employees’ experience and judgment after those individuals have handed over the reins.

Addressing the issue of our aging population is a matter for society as a whole. We need to remove restrictions on how pensions are drawn and provide retirement-financing products better suited to the longer lives of the elderly. Pension plans — both public and private — must rescind incentives for early retirement and should offer full actuarial value to those who choose to defer retirement. Annuities need to contain provisions for growth after retirement while controlling risk.

Changes are already afoot. Retirement and pension ages in many Organisation for Economic Co-operation and Development (OECD) countries are starting to increase. Legislators in the United States and the European Union are under constant pressure to tackle age discrimination. Restricting compulsory retirement will foster — or force — changes in work culture and minimize ageism. Our mental model is already changing from one of a “cliff edge,” with an abrupt change from work to retirement, to more of a “plateau.”

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