Sometimes there is a need to stay on a particular topic to emphasise its importance. Last week I dealt with the issue of retirement and whether it is even practical in this day and age to consider retirement in the traditional sense as something to aspire towards. The focus of last week was on you and the things you should consider when assessing your retirement needs and options. Today we are going to look at this topic in a broader sense and the headwinds to your retirement life. You will need to adapt to this reality.
“No megatrend will define the next 40 years more than the global pension crisis”. These words were written by Richard Marin in his 2013 book, Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap. It underscores a massive problem that will touch every citizen of Trinidad and Tobago in the coming years.
While this storm gathers momentum worldwide, we in Trinidad and Tobago face a unique vulnerability due to our reliance on a dwindling hydrocarbon resource. The issue of diversification of the economy is something that citizen don’t really hold their politicians accountable for. Except that it is our dwindling hydrocarbon resources that have given rise to the levels of transfers and subsidies that we currently enjoy.
These benefits are out of necessity, being removed or reduced one by one and what has to replace is our own, individual, income-earning ability, so that we can pay for the things that we want in order to have the standard of living that we are accustomed to. The only way this happens is through a diversified economy comprising of high-paying jobs and so while we relate this to the realm of economic “ole talk” and political banter, it is going to have a significant effect on your life going forward. As the old people say, “who doh hear will eventually feel”. The time to act is long past the due date.
Speaking at the Financial Analyst Seminar in July 2014, Marin framed the forthcoming pension crisis as a “species-defining” event. As he explained, our human identity is shaped by how we support our young and care for our elderly. The balancing act between these polar age groups will become a fierce competition over the next few decades. That was nine years ago. Since then, the fallout from COVID-19 and high inflation has brought this “species-defining” event ever closer to your doorstep.
The task at hand? Navigating between catering to the grandparents of tomorrow (that’s us, over 40s) and fostering opportunities for future generations (our children’s children) to ride the wave of growth that we have enjoyed. As pension deficits swell, this turns into a financial tug-of-war: ensuring essential services for our seniors could mean curtailing opportunities for our youth.
This debate is political dynamite, too. It brings into sharp focus the democratic dilemma of different social groups vying for their slice of the economic pie, potentially at the cost of the other. We experienced a microcosm of this during the COVID-19 pandemic. A virus that disproportionately impacted the elderly resulted in enforced mass lockdowns, children being denied in-person schooling, and young adults being prevented from working and earning a living. Appreciate that this issue concerns everyone, not just someone thinking of their retirement.
The pyramid paradox
The old saying goes, “demographics is destiny,” and understanding this is key to grasping the enormity of the problem, both globally and here in Trinidad and Tobago.
Historically, society was structured as a demographic pyramid. Picture a wide base of younger people, narrowing as you climb towards an apex of older folks. For centuries, children were the go-to pension plan. Not only that, but up until a hundred years ago, they also formed a workforce, contributing economically to their families. It made sense to have lots of children: they could assist with chores in an agrarian society, while the elder siblings could also care for the younger ones.
Plus, with the mortality rates of the time, families needed to have around five children to ensure they had enough surviving offspring to care for them in old age.
Today, the tables have turned. Rather than being a “benefit”, children now represent a “cost” to their parents. For the first 18 years of a child’s life, they contribute little economically to their family, but costs can be around $300,000 (say $1,500 per month) to $1,000,000 over that period.
This economic shift has had societal repercussions. Alternative lifestyles, which bypass traditional family structures, have gained popularity. The social and eventually economic impact?
Lower birth rates. In much of the developed world, the birth rate has fallen below the “replacement rate” of 2.1 children per woman, the rate necessary to maintain the current population level. For reference, the fertility rate in Trinidad and Tobago as of the 2010 population census is 1.7 children per woman. It may even be lower now.
Concurrently, advancements in healthcare have extended lifespans, inflating the older population at the top of the pyramid. This demographic shake-up is having palpable effects. The pyramid is shifting towards a more skyscraper-like shape, with a smaller base and a wider top. In just a few decades, we’ll see a demographic structure that resembles a skyscraper with a tapered top. In many Western countries, this trend is well-advanced.
The shift means fewer young people are available to support the non-working or retired people at the top of the pyramid. Worse still, the economic events of the past decade have chipped away at the retirement savings of those nearing retirement, while also swelling the ranks of unemployed youth. This is a ticking demographic bomb.
Consider this: the traditional family unit – a husband, wife, and five or more children – is shrinking to families with two children or fewer. Some people are opting to have children later in life, or not at all. Those without children are likely spending the majority of their disposable income on current consumption, rather than saving for retirement.
Picture a significant pool of unemployed or underemployed youths, a situation made worse by extended school closures during COVID-19. If T&T’s economic growth continues at its current sluggish pace, this issue will only worsen. Scarce job opportunities mean it takes longer for young people to acquire life’s essentials, like a home or car. Consequently, retirement savings become an afterthought.
Marin’s book forecasts a jaw-dropping US$100 trillion shortfall in global retirement funding by 2050. To fill this gap, money will have to be sourced from heavily-indebted nations, or through skyrocketing taxes. The other option? Painful cuts to benefits, leading people to postpone their retirement and work longer.
Forward planning is crucial. It’s unfair to spring on someone five years away from retirement that they’ll need to work another five to eight years. Plus, job opportunities must be available for new workforce entrants even as seniors remain on the job.
To underscore this point, let’s consider T&T’s age dependency ratio up to the last census. This measures the ratio of people reliant on the working-age population for support—a crucial metric for our pay-as-you-go taxation system. In 1962, our age dependency ratio stood at 87 per cent, almost a one-to-one relationship between working-age people and dependents.
At that time, the larger pool of “dependents” were children, accounting for 80 per cent of the ratio.
Fast forward to the most recent data: as T&T has grown more affluent and the bite of inflation has deepened, families are having fewer children, driving the under-15 ratio down to around 30 per cent. In contrast, the ratio of over-65s to the working-age population has nearly doubled from 7 per cent in 1962 to 13 per cent.
We’re beginning to see the effects of these demographic shifts. The overall age dependency ratio hit its lowest point in 2009, at 38 per cent.
Around eight years ago I had data that estimated it at 43 per cent, largely due to an increase in the over-65 population. It is likely to be higher today.
We have been aware of this looming crisis for a long time, but our actions have been sadly inadequate. How long have we been aware? Let me take you back to former Prime Minister Patrick Manning in a 2004 budget speech: “...But perhaps, of greater concern Mr. Speaker, is the urgent need for individuals to ensure they are in receipt of an appropriate level of income in retirement, thereby reducing the risk of poverty in their retirement years...”
Fast forward almost two decades, and we’re still debating the merits of a much-needed diversification programme, while citizens lack viable investment opportunities. We still do not have a handle on adjusting the retirement age and our national pension system is significantly challenged. It seems like we are waiting for the tsunami wave to come ashore.
Ian Narine is a financial consultant
who is hoping that this topic will gain traction so that it will not be retired
after this column. Please send your comments to firstname.lastname@example.org