A demographic time bomb

To understand the world of pensions it is first necessary to appreciate what is happening to the world's population (demographics): as a species we are aging at an alarming rate and the current trends are projected to get worse.

Fewer people are being born and people are living longer. Such a situation inevitably leads to a growth in both the number and importantly, the proportion of 'older' people (aged over 60) in society. The current increases in the proportion of the older population are unprecedented in the history of civilisation and are set to continue throughout the 21st century.

Currently one out of every ten persons in the world is 60 or older, but by 2050 it will be one in five and by 2150 it will be one in three. The situation is more extreme for developed countries where, in Europe for example, a fifth of the population is currently over 60, rising to a third by 2050.

By 2050, the total number of older people in the world will exceed the number of younger people (under 15) for the first time in history.

Not only are more people surviving to old age, but once they are there, they tend to live longer. People born in 1950 could expect to live to just 46 on average, whereas people born today should live until age 66. People born to developed countries obviously have higher life expectancy and if you were born in Malta in 1950 you could expect to live to age 65, whereas Maltese born today should survive until age 78. By 2050 life expectancy in Malta will be 84 and nine per cent of the population will be over 80.

The average age in the world today is 26 years, but this is expected to increase to 36 years by 2050. In Malta the average age is already 36 and is projected to increase to 46. Compared to the rest of Europe, Malta is about average. Italy and Spain have the greatest problem of aging populations where, by 2050, the average ages are projected to be at least 55, with more than 40 per cent of the population being over 60.

So what are the consequences of an aging population? The affects can be felt on a number of levels: economic, social and political. It affects social behaviour and patterns, family composition and living arrangements, health and health care, savings and investments, economic growth and even political voting patterns. The most dramatic impact of an aging population is however felt in pension provision.

There will be fewer people working to support those who are retired.

This is best illustrated by looking at the old-age dependency ratio (or 'Support Ratio'), which compares the number of people working to support those who are retired.

Throughout the world in 1950 there were 11 people working to support each person retired. Malta was much closer to this level than the rest of Europe; however by 2000 we had seen a sharp fall with only five people working per retiree.

Compared to the rest of Europe and, in particular Spain and Italy, Malta's population is relatively young, however future demographic trends will mean that the support ratio in Malta will fall to similar unsustainable levels. By 2050 there will only be two people working to support each retired person in Malta (compared to five people today).

Traditional state pensions operate on a pay as you go (PAYG) system, meaning current national insurance contributions are used to provide current pensions. There is no fund accruing for your future pension.