When baby boomers started working, about 5 of them had to work to provide for every pensioner. Today, this number has gone down to around three workers per pensioner in OECD countries. And this will only get worse based in the OECD projections, thirty years from now there will be less than one worker per pensioner, when the baby boomers all retire. This does not look good.

So of course, this raises the question, can Gen-Z (and Millennials) actually afford to pay for ALL Boomer pensions?

In France, this question is not a theoretical math problem, it is already leading to a never ending political crisis.

‘ ‘ ‘ In the capital, thousands of people taken in the streets after French president Emmanuel Macron forced through an unpopular bill that raise the retirement age from 62 to 64 years old’

And, given that France is actually a relatively YOUNG rich world country,

AND that, ON TOP OF PENSIONS, medical costs will skyrocket as the Boomers turn 75, Economists like professor Charles Goodhart from the London School of Economics have said that, unless A.I. gives us a miracle —far bigger than we are seeing so far— economically speaking

the next 40 years are not going to be anything like as wonderful as the last 40 years.

So, what can we expect? Political crises in France, the UK and Germany make it clear that the current pension system, where Gen-Z and Millennials pay boomers CAN ONLY BE SUSTAINABLE if we drastically increase the retirement age, cut pensions, OR if young people accept SKY HIGH TAXES.

But, there is hope. Small north European countries like Denmark, The Netherlands, and Iceland, have systems where every pensioner saves for their own retirement. All of these savings are then pumped into stock markets…

which have historically only gone up….. right? right??

Hmmm it makes you wonder. Have these countries really found a magical pension solution? Or are they blowing yet another financial bubble?

To answer these questions, our team has spent weeks interviewing experts, diving into the various pension systems, and population data of all rich countries around the world. And, what we found was quite interesting, Denmark and the Netherlands may be right, just not in the way they think.

But, before we get into how we can save boomer pensions AND young people’s incomes at the same time, we first need to confront reality. What happens if we do nothing. Here’s

Ch1 The unsustainable reality of our pension systems.

Broadly speaking, there are two ways countries finance their pension systems: funded systems, where workers save for their own pension and the so called pay-as-you-go system, where current workers pay for current retirees.

In practice, most countries use a mix of both systems, but the balance varies widely.

Countries like Germany, Spain, and Italy rely almost entirely on pay-as-you-go pensions, where benefits are financed by today’s workforce. By contrast, countries like Denmark and the Netherlands depend much more heavily on funded systems, where people save for their own retirement using public or private pension funds that invest in bond and stock markets, using the returns earned there to minimize contributions.

Right now, countries like Italy, Germany and France, that rely on pay-as-you-go systems are facing severe pension crises because it is very clear their pension system was NOT built for a rapidly ageing population. Fewer workers that pay the same contribution, to support more retirees that want a stable pension income. The math simply DOES NOT WORK.

Therefore, countries have tried 4 controversial ways to make the system sustainable. The first option is to raise the retirement age. Germany, the UK, and the Netherlands are all moving toward 67. Meanwhile, Italy will go even further, they have tied the retirement age to rising life expectancy, meaning that it will rise to 70.

However, as you can imagine, many people who are close to retirement are not exactly thrilled about this. Why should THEY pay the price for the unsustainable pension system? This applies especially to workers in physically demanding jobs. Therefore, Italy’s prime minister Meloni is now facing strong pressure from labor unions to freeze the retirement age at 67.

Luckily for Meloni, there are 3 more options.

The second option is to reduce pension payments. So far, this has only happened in cases of massive political crisis, such as when Greek pension payments were cut during the Greek debt crisis. What SOME GOVERNMENTS have done though is pretty smart. They pledged to cut pension payments in the future, not today. After all, people are less likely to protest getting a lower income, IF THEY DON’T FEEL IT YET. For example, in Germany the average pension was set to fall from 48% of the average wage to 45% by 2040. Still here a 3 point drop seemed a bit too far, especially for older workers close to their pension. They have revolted, causing politicians to raise this back to 46%.

This then brings us to the third option, raising worker pension payments. For example, between 2018 and 2023, Canada has been gradually increasing the contribution rate from 5 to 6%. Similarly, Mexico and South Korea have announced worker contributions will have to increase. But, again, this is politically so tricky.

When it comes to pension reforms, there are no good option. More retirees and fewer workers. Someone will have to take a hit. This is why Pay-as-you-go pension reform almost always triggers massive public backlash.

You still have roughly two-thirds of the French population opposed to the pension reform. That’s why the political instability just keeps going. France needs a budget, but it can’t actually put one together.

Although there is of course a simpler option. For example, the most rapidly ageing country in the world, has so far avoided politically very hard pension choices by simply … increasing government borrowing. And, honestly, while people like to think about government inefficiencies and bureaucracies are behind ever rising government debt, the cold hard reality is that, for most of the rich world, it has mostly been increasing social security payments to pensioners AND ever increasing healthcare costs… that also mostly go to pensioners.

Sadly, today it seems like more and more governments are hitting the limits of what they can borrow without facing massive consequences. Both the UK and France recently flirted with a government debt crisis… not coincidentally these are the two countries with some of the most generous pension payments…

So, it seems like governments now have to make a really hard choice between 3 bad options:

  1. increase the pension age, pissing off Gen-X and young boomers who are close to the pension age
  2. cut pension benefits, pissing off boomer pensioners or again Gen-X’ers who are close to the pension age
  3. OR increasing taxes massively, pissing off Gen-Z and Millennial workers

OR…. DO THEY?…. Could it be that countries like Denmark and the Netherlands have discovered a magical FIFTH option. An option that seems to make the system both more fair and more sustainable. What if workers saved for THEIR OWN retirement, instead of relying on future generations to pay the bill? This is exactly

2- The promise of fully funded system

Heavily funded pension systems like those in Denmark, the Netherlands (and Iceland by the way) are consistently ranked as being the most sustainable on the planet.

And, on the surface, it’s easy to see why. In these systems, rather than paying for an older, potentially much larger generation, Danish and Dutch workers mostly save for their own pension via either private or collective pension funds. These funds then invest savings in financial markets. Rather than being funded by current workers, these pension funds pay out a pension based on what the worker saved + the returns the pension fund made on these investments.

This CLEARLY LOOKS more sustainable than a pay-as-you-go system. Instead of relying on a shrinking workforce to pay current pensions, retirement is financed by what each generation saved + financial market returns. And, while financial markets may go down from time, in the long-run, financial markets can only go up… right?

So, it SEEMS like in these countries, Gen-Z, Millennials, Gen-X and Boomers, they just each pay for their own pensions. Gen-Z is NOT supporting the much larger boomer generation.

But…. is that actually true? Because, this story got me really suspicious. You see, as macroeconomists, I was trained to distinguish between what happens in the financial system and what happens in the real economy—the economy of goods and services: the total amount of output, doctors, food, and care. Financial markets OFTEN act very differently than the underlying economy. Yet, in the long run, financial assets like stocks in companies are merely claims on future goods and services. So, if the economy suffers because of ageing …. then of course, these companies will start to suffer as well.

In theory, stock market prices should reflect company prospects. However, in the short run, meaning decades, this DOES not have to be the case. You see, what also matters for financial markets… is how much money people invest in them, compared to doing other things.

In fully funded systems, the government has essentially forced people to INVEST more in financial markets. So, when a large generation like the baby boomers enters the workforce, millions of people start saving at the same time. Pension funds are suddenly flooded with cash and rush to buy assets. As a consequence, prices of assets go up and up and forever up.

That is… until, the demographic situation flips. If the boomers start retiring, then all of the sudden people are taking more money OUT of their pension funds than the smaller generations are putting in. So, if forced saving RAISED all asset prices at the same time. Then, of course, mass retirement SHOULD IN THEORY cause a sustained asset MELTDOWN.

This simple logic is behind the asset meltdown hypothesis, which states that once the boomer generation retires, the flow will reverse.

Pension funds now need to sell MORE and MORE assets to pay out pensions. But this time, the new generation who is supposed to buy all of those assets is smaller. Already in 1994, based on US demographics, dr. Sylvester Schieber and professor John Schoven predicted that PRIVATE pension funds in the US would start emptying out around 2024.

That’s right, this problem will not just hit countries with fully funded systems like Denmark and the Netherlands, it will affect PRIVATE pension funds around the world, which boomers and Gen-Xers have used to supplement their pensions.

In the past 40 years many boomers have already saved for their own pensions. This created massive demand for stocks and bonds, contributing to the massively impressive stock market gains that we have seen, despite Western economies growing far more slowly than in the years before.

When they start selling off assets, optimistic pension sustainability calculations in countries like Denmark and the Netherlands could become meaningless. For example, the Dutch have saved very conservatively. So, conservatively that a 2% average profit on asset markets would be enough to cover pension payments.

But, what if the asset meltdown hypothesis is correct? What if so many people retiring in the coming decades mean that financial markets will stop rising forever, and rather start falling.

In that case countries with fully funded systems will again face the same difficult choice that pay-as-you-go countries like the UK, Germany and France face today.

But, is that indeed what will happen. Are fully funded systems just a financial trick that won´t solve the fundamental demographic problem of lower workers per retiree.

The answer is yes, and it won’t work. ⁓ It doesn’t matter whether you try and fund it because the cost of funding it will become increasingly severe.

Now, luckily economists have found that so far, many pensioners actually don’t perfectly spend down their pension savings, typically dying with substantial saved up assets, which are then passed on to the next generation.

So, this could soften the blow. But, still the underlying demographics are hard to escape…. whether you are a pay-as-you go or fully funded country, the cold hard demographic reality is that if more people retire compared to those who work, less stuff is made, while demand remains high.

Therefore, economists like Goodhart and his co-author Pradjan predict that what they call “The Great Demographic Reversal” will lead to decades of

  1. lower asset prices
  2. higher inflation
  3. higher taxes
  4. and … lower inequality

Which, is perhaps the only positive take-away. After all, if there are not enough workers, especially in the lower paid care sector, then these workers can demand higher wages. Yet, even these workers with higher inflation. So, overall the reality will remain, ageing will lead to 3 tough political choices

  1. retire later
  2. lower pensions
  3. higher taxes

Or will it… because actually, when doing the research for this video, a strange thought popped into my head, could the fully funded system be superior after all? At least for small ageing countries like Denmark in the Netherlands.

You see, a pay as you go system is NATIONAL. German gen-Z workers pay for German Boomer pensioners. German demographics determine the sustainability of the German pension system. But, Dutch and Danish pension funds, they have invested the MAJORITY of Danish and Dutch boomer pension savings ABROAD, especially in the US, which has a better demographic profile.

So, could it be that, while fully funded systems are essentially a trick, that MAY cause an asset meltdown when most boomers retire…. smaller old countries may avoid this scenario for a long time, if they invest in sufficiently long economies…

We will have to see.

In fact, that is the

Conclusion

for this entire video. We will have to see. You see, the world has simply NEVER gone through this demographic transition before. So, the asset meltdown hypothesis, and Goodhart’s predictions of increased inflation, higher taxes and lower inequality… these have never been scientifically tested… at least not in the West.

Because, interestingly, the asset meltdown hypothesis may have been tested in Chile during Covi.%20…-,…,et%20al.%2C%20%2C%202023.)d. You see, to alleviate the financial stress many households felt during the pandemic, the government allowed them to access their pension savings. Guess what happened?

  1. the local stock market crashed
  2. there was a massive inflation spike
  3. the government stepped in, essentially nationalizing the pension system.

That’s right, two of Goodhart’s main predictions immediately came true when Chile’s pension systems were drawn down. So, sadly, I suspect there’s a real chance professor Goodhart will soon be proven right that

the next 40 years are not going to be anything like as wonderful as the last 40 years.

That is… unless we do actually see a miracle from A.I. where honestly, there are some pretty incredible developments.