Should you rely on a state or government pension? The impact of underfunding, lower bond yields and changing demographics

A significant increase in life expectancy during the 20th century has been one of the greatest achievements for society. Better living standards, more nutritious diets, access to cleaner drinking water, success in the fight against infectious diseases and advancements in science have all contributed to the increase in life expectancy.

But the world is aging. Babies born in 2018 can expect to live to over 100. In 2015, there were around 600 million people aged 65 or over and that number is expected to rise to over 2 billion by 2050.

For those relying on government or state or public sector pensions, it isn’t looking good. As examples, we cover the numbers for the UK and the US. The UK currently has $6.2 trillion in underfunded government and public sector employee pensions. For the US that amount is over $25 trillion. This is mainly down to lower bond yields than previously estimated. A lot of previous funding assumed 7% bond yields, the number has been much closer to 2.5% since 2009 which has caused major deficits.

In the UK, the private sector pension deficits are estimated to be around £ 115 billion ($159 billion) with 4 companies BAE Systems, BT, BP and Royal Dutch Shell each having a deficit of over £6 billion ($8.3 billion) each. Although the total UK private sector pension deficit has reduced from a peak of £400 billion ($552 billion), we recently have had retailer BHS and construction major Carillion collapse leaving pension deficits of £570 million ($789 million) and £800 million ($1.1 billion) respectively which might force pensioners (current and future) of those companies having to take big cuts to their pension.

There is another problem as well, there are currently 8 workers in employment for every retiree today. That number is likely to reduce to 4 workers in employment for every retiree by 2050 which means government or state retirement ages will only rise further. Today, 20% of those aged 65 or over are still working in the UK and that number is rising. May be people will have to work longer but with machines set to take over several jobs would that be possible?

“You get old faster when you think about retirement.” – Toba Beta, Master of Stupidity

2 Replies to “Should you rely on a state or government pension? The impact of underfunding, lower bond yields and changing demographics”

    1. Hi,

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