As a result, the IMF said younger workers need to take steps now to supplement their retirement income if they want a lifestyle equivalent to today’s retirees.
Ultimately though, it will probably require a combination of working longer and saving more for retirement to achieve that goal, it said.
Pensions and other types of public transfers to the elderly currently account for about 60% of their income in countries that are members of the Organisation for Economic Co-operation and Development (OECD).
For those born between 1990 and 2009, who will start to retire in 2055, increasing retirement ages by five years—from today’s average of 63 to 68 in 2060—would close half of the gap relative to today’s retirees, the IMF report said.
“Simulations suggest that if those born between 1990 and 2009 put aside about 6% of their earnings each year, they would close half of the gap in the economic replacement rate relative to today’s retirees,” the IMF added.
Luck needed
However, in practice relying on private savings for retirement will still require a hard-to-achieve mix of fortune and savvy for four main reasons, according to the international body.
First, individuals need continuous and stable earnings over their careers to be able to save sufficient amounts.
Second, workers would have to be able to decide how much to put aside each year and how to invest their savings.
Third, the risks from uncertain or low returns are borne by individuals.
Finally, workers would have to decide how fast to consume their savings during retirement.
“These are all complex decisions, and people can make mistakes at each step along the way,” said Mauricio Soto, a senior economist in the IMF’s Fiscal Affairs Department who wrote the report.
However, on a brighter note the IMF said that while retirement might be the last thing on the mind of the average millennial, “the good news for younger workers is that retirement is some four decades away, allowing time to plan for longer careers and to put money aside for later”.
“But they must start now.”
