The $400 Trillion Problem No One Wants to Talk About

0:00 Across the developed world, the math on pensions is falling apart.

0:03 In the 1950s, there were 16 workers for every retiree in the United States.

0:08 Today, there are fewer than three,

0:10 and by comparison, they are still doing pretty well.

0:12 In Japan, the working age population has shrunk

0:15 by 14 million since 1995, and in France,

0:18 pension spending already eats up 14% of the country's GDP,

0:21 one of the highest shares in the world.

0:23 These systems were built for a time where people

0:26 had more children and had fewer years in retirement.

0:29 But that world is gone.

0:31 Global life expectancy has jumped by 30 years,

0:34 birth rates have collapsed, and the numbers simply don't balance.

0:37 By 2050, one in six people on earth will be over the age of 65,

0:42 up from one in 11 today.

0:44 At the same time, fertility rates have fallen

0:46 below replacement levels in nearly every developed country,

0:48 and that means fewer people entering the workforce

0:51 and fewer taxpayers supporting everyone else who's already retired.

0:53 But even still, almost no government wants to touch

0:56 the problem because fixing it means asking people to work longer,

0:59 pay more, or get less, and none of those options wins elections.

1:03 Already this rock and hard place

1:05 is destabilising several major global economies,

1:07 and by the numbers alone, it's only going to get worse.

1:11 So, is the pension problem possible to solve?

1:14 What happens if we don't?

1:16 And finally, is there any country that's

1:18 actually making any progress on this issue?

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2:22 Pensions were one of the greatest economic promises of the 20th century.

2:26 You work now, you contribute to the system,

2:28 and then you retire and society takes care of you.

2:31 But that deal only works if the math does, and increasingly, it doesn't.

2:36 Most pension systems around the world run

2:38 on what's called a pay as you go model.

2:40 The money you pay in today doesn't go into a vault with your name on it,

2:43 it goes straight to today's retirees.

2:45 Then, when it's your turn, the next generation of workers fund your retirement.

2:49 This system worked well enough in the decades

2:51 after WW2 because economies were growing, birth rates were high,

2:54 and there were plenty of workers to support every retiree.

2:57 In 1950, the United States had more than 5 times

3:00 as many workers for every retiree as they have now,

3:02 and that meant a massive base of contributors

3:05 supporting a relatively small number of people collecting benefits.

3:07 Fast forward to today,

3:09 and that ratio has collapsed from 16 to just 2.7 workers per retiree.

3:14 And remember, that's also including the influx of women entering the workforce,

3:18 so the change is even more drastic than the numbers alone would suggest.

3:22 By 2035, it's expected to fall even further to 2.3.

3:26 We're seeing this trend everywhere.

3:28 Across Europe, Japan, and South Korea, the ratios are even worse.

3:32 Some are already approaching just 2 workers per retiree.

3:35 This is what economists call a dependency ratio crisis.

3:38 Too few people working to support too many people not working,

3:42 and the consequences are enormous.

3:44 In the United States, the most immediate danger is insolvency,

3:47 meaning the inability of the system to cover what it owes its retirees.

3:51 The US runs the largest pension system in the world,

3:54 with over 73 million people receding social security.

3:56 It's funded by a 12.4% payroll tax split between employees and employers,

4:01 so in theory the system balances itself.

4:03 As long as enough people are paying

4:04 in, there should always be enough to pay out.

4:07 But now that balance is starting to go off kilter.

4:09 By 2035, social security's combined trust funds

4:11 are projected to run out of reserves.

4:14 After that, payroll taxes will only cover about 83% of promised benefits,

4:18 down from nearly full coverage in past decades.

4:20 In other words, unless something changes,

4:22 retirees could see an automatic 17% cut to their income.

4:25 For the average American retiree living on $1,900 a month,

4:28 that's $300 they can't afford to lose.

4:31 And we haven't even accounted for inflation yet.

4:34 Even if benefits stay the same on paper,

4:36 rising prices are already eroding into what those dollars can actually buy,

4:40 meaning each social security check is worth less in real terms every year.

4:43 And that's just at the federal level.

4:45 State level pension funds are in deep trouble too.

4:48 As of 2022, state pensions were underfunded by $1.27 trillion.

4:52 In states like Illinois, New Jersey, and Kentucky,

4:55 public pension plans have less than 60%

4:57 of the assets they need to pay future retirees.

4:59 That shortfall is the equivalent of about

5:02 7% of those states early retirement income.

5:04 Now, if America's problem is running out of money,

5:07 Japan's is running out of people.

5:09 With a median age of nearly 50,

5:11 Japan has the third oldest population on earth behind only Monaco and St.

5:14 Pierre.

5:15 By 2050, close to 40% of Japan's citizens will be over 65,

5:19 and since 1995, its working age population has shrunk by 13 million.

5:23 That means pension spending now eats more than 9% of Japan's GDP.

5:27 Besides too many people retiring,

5:29 Japan also shoulders a loss generation that never had

5:31 a fair shot at saving for retirement in the first place.

5:34 After Japan's economic bubble burst in the early 1990s,

5:37 companies froze hiring and slashed wages.

5:39 Millions of young graduates found themselves locked

5:41 out of Japan's traditional corporate career tracks,

5:44 and they were forced into part-time or temporary jobs.

5:46 The country now calls this era the Employment Ice Age.

5:49 During this time, employees worked without benefits, without job security,

5:53 and most importantly, without access to the main pension system.

5:56 Now, 30 years later,

5:57 the same generation is entering its 40s and 50s with very little savings,

6:01 patchy pension contributions, and no stable safety net.

6:04 Economists warn that when they reach retirement age,

6:07 Japan could face a serious crisis,

6:09 millions of elderly citizens with almost no pension at all.

6:12 That is a terrifying prospect for a country that's already stretched thin.

6:15 The government now spends more on pensions than healthcare than ever before,

6:19 about 20% of Japan's entire economy.

6:21 To keep up, it's had to borrow heavily,

6:23 helping to push public debt to over 250% of GDP,

6:27 the highest in the developed world.

6:29 France faces a different kind of pressure, not in solvency,

6:32 but the fiscal weight pensions put on the national budget.

6:35 Pension spending already eats up about 14% of France's GDP,

6:38 one of the highest shares in the world,

6:39 and that means that every euro spent on keeping the pension

6:42 system afloat is a euro that can't go towards hospitals,

6:45 infrastructure, energy, defense, or just balancing the national budget.

6:48 And then there's China.

6:49 Unlike Japan or France, China's pension system is relatively new,

6:52 but it's aging at record speed.

6:54 Decades of the One Child Policy have left China with a narrow

6:57 base of young workers and a rapidly growing elderly population.

7:00 By 2050, nearly 366 million Chinese citizens will be over 65,

7:05 more than the entire population of the United States today.

7:09 According to government forecasts,

7:10 China's national pension fund could run dry by the early 2030s.

7:13 That is a massive challenge for a country whose

7:16 people have become accustomed to rapidly improving living standards.

7:20 Unlike advanced economies,

7:21 China hasn't had decades of prosperity to build private savings,

7:24 so millions of retirees will depend heavily on a system

7:27 that might not be there when they need it most.

7:30 Add all of this together, and the global picture looks grim.

7:33 The World Economic Forum estimates that by 2050

7:35 there will be a $400 trillion gap

7:37 between what people need in retirement and what's

7:40 actually been saved to pay for it.

7:42 That's about four times the size of the entire global economy today.

7:45 So, if the problem with pensions is so obvious,

7:48 what are governments doing to fix it?

7:50 Well at the moment, not much.

7:52 Every solution comes with short-term pain

7:54 and politicians aren't rewarded for solving long-term problems.

7:56 That's why even leaders who really agree on anything take the same stance here.

8:01 Donald Trump said earlier this year, social security won't be touched,

8:04 other than if there's fraud or something.

8:06 It's going to be strengthened.

8:07 Biden made the same pledge.

8:09 If anyone tries to cut social security or Medicare

8:12 or raise their retirement age, I will stop it.

8:15 Fixing pensions means asking people to either work longer,

8:17 pay more, or get less.

8:19 And none of those options wins elections.

8:21 In democracies, most leaders think in two to five-year cycles.

8:25 Pension systems, on the other hand, are 100-year promises.

8:28 That mismatch between political time and demographic time is

8:31 why everyone keeps kicking the can down the road.

8:33 Take one of the simplest fixes.

8:35 Raising the retirement age.

8:36 Economically, it makes sense.

8:38 People live longer, so working a few extra years should help balance the system.

8:42 But let's take France as an example.

8:44 When the government raised the retirement age from 62 to 64 in 2023,

8:49 millions of people took to the streets.

8:51 Garbage piled up in Paris, strikes shut down trains and schools,

8:55 and approval ratings for President Macron plummeted.

8:57 Even though France spends more of its GDP on pensions than most other countries,

9:01 voters saw the reform as a betrayal of a hard-earned right.

9:05 So raising the retirement age has proved challenging.

9:07 So then, the second option is cutting benefits.

9:11 Again, it works on paper.

9:12 If there isn't enough money, you reduce payouts,

9:14 but in practice, it risks pushing millions of seniors into poverty.

9:17 In France, nearly a quarter of retirees already

9:20 rely on their pensions as their only income.

9:22 In Japan, roughly one in five seniors already lives in relative poverty,

9:26 which means even modest cuts risk pushing hundreds

9:28 of thousands of people below the poverty line.

9:30 And inflation is only making things worse,

9:32 lowering the real value of those payments year after year.

9:34 And then there's another layer to the dilemma.

9:37 Older voters are the most likely to turn up to the ballot box.

9:40 They are also the ones with the most to lose from pension reforms,

9:43 so politicians have every incentive to protect benefits,

9:45 even if it means blowing up the budget later.

9:48 Now, if governments can't cut spending, their next move is to raise revenue,

9:52 usually by asking younger workers to pay more.

9:55 The problem is that raising payroll taxes hits

9:57 every group that already feels squeezed by housing costs,

10:00 student debt and inflation.

10:01 In places like the UK and Japan,

10:03 younger generations increasingly doubt they'll ever see the benefits

10:06 they're paying for, and if taxes climb too high,

10:08 young, mobile workers can simply leave to chase

10:11 better opportunities in countries with lower burdens.

10:13 But there's the fourth option, privatisation.

10:16 In theory, privatised systems shift for a responsibility

10:19 from the government to the individual,

10:21 reducing the long-term strain on public finances.

10:23 Chile tried this back in 1981.

10:25 It replaced its state pension system

10:27 with the private retirement accounts managed by investment firms,

10:30 and for a while, it looked like a success.

10:32 The model was praised internationally and even inspired parts

10:35 of pension reforms in Latin America and Eastern Europe.

10:38 But over time, cracks started to appear.

10:40 Many workers couldn't afford to contribute enough,

10:42 and market downturns slashed returns.

10:44 The result was that pensions were far small than promised,

10:47 and the people of Chile took to the streets to protest and demand reform.

10:51 The Chilean government eventually had

10:53 to step back and guarantee minimum payments,

10:55 essentially re-socialising the system it had once privatised.

10:58 Some countries have gone a different route with self-funded

11:01 retirement systems that encourage people

11:02 to save through tax-advantaged accounts.

11:04 Here in Australia, our superannuation system,

11:06 often just called SUPA, is one of the best-known examples.

11:10 It's essentially a mandatory retirement savings plan built into the workplace.

11:13 Employers are required to contribute a percentage of an employee's income

11:16 into a personal account that workers can access once they retire.

11:20 Employees can also top it up with voluntary contributions,

11:22 and both are given favourable tax treatment to encourage saving.

11:25 Over time, those contributions are invested into stocks, bonds and real estate,

11:29 growing into a large nest egg

11:31 that supplements or even replaces government pensions entirely.

11:33 It's a system that's been running for more than three decades,

11:36 and it's transformed Australia into one

11:38 of the world's biggest holders of retirement assets.

11:40 More than $4 trillion in total,

11:42 that's larger than Australia's entire annual GDP.

11:44 In theory, the model takes pressure off public

11:47 pension budgets by shifting responsibility to individuals and employers,

11:51 but in practice, it comes with some big trade-offs.

11:54 The generous tax breaks designed to reward people for saving cost

11:57 the government dearly roughly 1.9% of GDP every year in lost revenue.

12:01 That's money that could otherwise be spent on healthcare,

12:05 education or infrastructure.

12:06 So, while superannuation reduces the long-term pension burden,

12:09 it also narrows the pool of funds governments rely on to run everything else.

12:13 It's also not perfect from an equality standpoint.

12:16 World-tier Australians benefit the most because they're able to contribute

12:19 more and take greater advantage of those tax breaks.

12:22 Meanwhile, lower-income workers who nominally benefit

12:24 far less from lower taxes end up

12:27 relying on the same public pension system the policy was meant to relieve.

12:30 So yes, it works, but mostly for those who are already doing well.

12:34 At the end of the day, all the choices come down to the same political paradox.

12:37 Everyone agrees pension reform is necessary,

12:39 but no one wants to be the one to do it.

12:42 The problem is the longer governments delay,

12:44 the more drastic the eventual fixes will have to So,

12:48 is anyone actually doing anything about it?

12:51 A few countries are.

12:52 In Denmark, for example, the retirement age isn't a fixed number,

12:55 it's tied to life expectancy.

12:57 As people live longer, the age to qualify for benefits rises automatically.

13:01 There's no huge national argument every few

13:03 years and some reforms that shock the system,

13:05 just a predictable adjustment that keeps things balanced.

13:08 When the rule was announced in 2006, the official retirement age was 65.

13:12 By 2030, it will rise to 68 and possibly

13:15 70 by the early 2040s if lifespans keep increasing.

13:18 That gives people decades to plan ahead

13:21 and keeps the system solvent without anyone feeling blindsided.

13:24 Germany and the Netherlands have followed similar paths.

13:27 Both countries have linked their pension age to demographic data,

13:30 effectively saying if we're living longer, we're working longer too.

13:33 In Germany, the retirement age is currently 66 and will reach 67 by 2031.

13:38 In the Netherlands, it's 67 and will automatically adjust with life expectancy.

13:42 Then there's Sweden, which many economists see as the model

13:46 for how reform pensions without political chaos.

13:48 Back in the early 1990s, Sweden's pay-as-you-go model was collapsing under

13:52 the same demographic pressures we're seeing today.

13:54 Lawmakers realised they had two options,

13:56 wait for the system to implode or rebuild it entirely.

13:59 They chose the latter.

14:01 Instead of promising fixed benefits forever,

14:02 Sweden switched to what is called a notional defined contribution scheme.

14:06 It works like this.

14:07 Each worker's benefits are tied to what they've paid in over their lifetime

14:12 and payouts automatically adjust if the economy slows or if people live longer,

14:16 so the system just corrects itself over time.

14:18 For example, when the global financial crisis hit in 2008,

14:21 benefits dropped by about 4%.

14:23 Not ideal, but the system stayed solvent and because the rules were transparent,

14:28 there were no riots, no protests and no panic.

14:30 Other countries are experimenting with more targeted fixes.

14:33 One approach is means testing,

14:35 which means scaling down or cutting pensions for the wealthiest retirees.

14:38 It's controversial, sure, because it challenges the idea that everyone gets back

14:42 what they put in, but when budgets are tight,

14:44 it can make sense to extend the most support to those who truly depend on it.

14:48 Australia and Canada both use some form of means testing.

14:52 In Australia, retirees with high incomes or large superannuation balances lose

14:55 part of their public pension once they pass a certain threshold.

14:59 In Canada, the guaranteed income supplement works the same way.

15:02 It tops up pensions for low-income seniors,

15:04 but gradually phases out as earnings rise.

15:06 New Zealand's approach is slightly different.

15:08 Everyone over 65 receives a flat pension

15:11 called New Zealand's superannuation regardless of income,

15:13 but it's taxed as regular income, which means wealthier retirees effectively pay

15:17 a portion back through their higher taxes.

15:20 It's a simpler, more transparent way to target support while

15:23 still preserving the sense that everyone contributes and everyone benefits.

15:26 So yes, there are no easy answers, but there are some lessons.

15:30 Countries that act early, like Sweden or Denmark, show that gradual,

15:33 automatic adjustments are far less painful than sudden crises.

15:36 People need to believe that the system will still be there for them.

15:40 The rules won't change overnight,

15:41 but contributing now will actually mean something later,

15:43 and reforms that are transparent,

15:45 predictable and fair can go a long way towards building that trust.

15:48 If economics teaches us anything,

15:50 it's that the longer you ignore a predictable problem,

15:52 the more catastrophic it becomes when it finally arrives.

15:55 So if pensions really are ticking time bombs

15:57 and governments can't agree on how to defuse them,

15:59 maybe it's time to think about something more radical.

16:02 We actually covered one such idea,

16:03 a plan from billionaire hedge fund manager Bill Ackman to give every newborn

16:06 household a thousand dollars to secure

16:08 their retirement before they even started working.

16:10 It's obviously controversial, especially considering who it's coming

16:13 from, but that doesn't necessarily mean it's wrong.

16:15 You should be able to click to that video on your screen now.

16:19 Thanks for watching mate, bye.