Looming old-age poverty as young people plan to retire without pension

By VINCENT OWINO

The world could be staring at a widespread poverty of senior citizens which will inflate governments’ expenditure on social protection, derailing economic progress, especially in Africa, where pension coverage is poorest.

Over the next two decades, the number of retirees could more than double across the globe as younger generations plan mass early retirement, but barely half of them have concrete retirement plans for financial resilience in their sunset days.

According to a recent poll by the World Economic Forum (WEF), younger people aged below 40 generally want to stop working at age 60 or earlier, much sooner than older generations who expect to continue working into their 70s.

Yet, more than 55 percent of the current working population globally have no retirement savings and aren’t covered by a pension schemes, meaning majority will rely on governments or their younger kin for financial support in their old age.

In Africa, 91 percent of working-age people are currently not covered by a pension scheme, and only 19.8 percent of people above the statutory age of retirement receive a pension.

Read: 13.9m Kenyan workers have no pension: Data

Decreasing fertility

The picture is just as bleak in the region, where averagely 88 percent of working people are not covered by a pension scheme, and with many planning to stop working as early as 50, old-age poverty could be a ticking-time bomb waiting to burst governments’ social spending budget in a few years.

As the younger generation plan to have fewer children, evidenced by the decreasing global fertility rate – currently at 2.4 births per woman, down from 3 in 2000, according to the United Nations – the burden of supporting senior citizens will fall more on governments than on younger family members as is the current trend.

What’s more, life expectancy has been improving with the increase in access to quality and affordable healthcare over the years across the globe. The World Health Organisation estimates that the average person will live up to 73.4 years, 13 years after the legal age of retirement in many jurisdictions.

Financial and retirement planner Rose Wakiria argues that many people aren’t preparing enough for retirement because they are hard-pressed with current needs, which gobble up most of their income leaving them with little or nothing to save.

“They also have poor spending habits such as instant gratification and lack financial management skills, hence don’t know how to optimise savings and investment to meet future needs, including in retirement,” she told The EastAfrican in an interview.

According to the WEF survey, titled “Living Longer, Better: Understanding Longevity Literacy,” younger workers have poor financial management skills because they are more likely to go for financial advice in all the wrong places.

The poll revealed that those aged below 40 are 8 times more likely to take financial advice from social media platforms like Instagram and Tiktok, while more of the older workers go to professional financial advisers or read to enlighten themselves on the topic.

Take-home pay

Interestingly, it is the younger people – who are least prepared for retirement and plan to stop working sooner – who general want more income in their retirement. WEF found that at least 75 percent of them more than half of their current take-home pay as pension, compared to just 61 percent of those currently aged above 40.

Read: BUWEMBO: Why all Ugandan workers need to join a savings scheme

Ms Wakiria argues that it is possible that the younger people are living in a bubble which will soon burst, and they will be confronted with the reality of old-age poverty, forcing them to work well into their retirement, contrary to their desires.

“Just like other generations before, I expect them to realise with time that retirement preparation is key and start preparing,” she said.
“Their retirement might, however, look different. They might continue generating active income from the ‘gig’ economy and other sources of income on need basis as opposed to a hard stop on earning an income in traditional retirement.”

Nonetheless, Ms Wakiria says, the situation poses a significant risk for governments and it should be aptly addressed with urgency.
“Eventually, when people can’t afford to take care of themselves, the burden falls on the government.

They provide assistance in various forms, diverting funds from investments and economic development perpetuating the dependency,” she said.

Economist Ken Gichinga agrees that this presents a “real risk” to the economic and fiscal planning of governments in the region and could significantly bar enough spending or investment in other important sectors in the future.

“When the expenditure on social protection increases, the government will have to draw from revenue meant for other things and that will definitely impact service delivery,” he said.

Emptying the pockets

Gichinga, who is the chief economist at Nairobi-based consulting firm Mentoria Economics, argues that it is the responsibility of the State to create a healthy environment for retirement planning.

“Failing to plan for retirement is a direct result of the government not investing enough in creating strong markets. When you have strong markets and a stable business environment like in the West, people invest even in stocks, for example, and that’s an investment in their future,” he said.

Besides creating strong markets, Gichinga argues, the government could incentivise formal employment by removing too many deductions and legal requirements that make people prefer the ‘gig’ economy, where they can pocket all their earnings, but in the process forget to plan for their future.

“If more than 80 percent of the labour force is in the informal sector, then it means there are some very real reasons why people want to remain informally employed, and according to me, I think the main reason is taxation,” he said.

Read: Adapting to the ‘new normal’: What next for informal women workers?

To avert the looming old-age poverty crisis, WEF asked governments to “explore the wider use of default auto-enrolment and default investment strategies to increase and maximise savings.”

The lobby also said introducing “education programmes at an early stage, focusing on quality of life and purpose in relation to longer lives” could also help in building financial resilience among the currently young workers.

According to Ms Wakiria, having financial literacy as part of the basic education curriculum will help buffer the growth of old-age poverty, but the State needs to do more to make people trust its institutions that seek to build financial resilience.

“The level of trust in government will affect how the citizenry buy into government’s proposed ideas,” she said.

“Proper management of the National Social Security Fund (NSSF) and paying civil servants’ pension on time will enhance credibility and uptake of retirement products.”