The Poverty of Nations (Apologies to Adam Smith)
We spent a lot of time in Chapter 2 reviewing the impact that demographics and pension funding levels have on the prospects for countries filling their pension gaps in the next 40 years. The math that drives our crystal ball should not be mysterious to anyone. There is, first and foremost, an assessment of need based on how many retirees you will have in the next 40 years. The combination of population's statistics and longevity standards in each country give us that number fairly easily. Calculating pension need is done simply here by taking 60 percent of the final earnings level in that country. That may or may not suffice, but it is a fair estimate. We then discount those requirements back to present value of the need in assets today, assuming we will do a decent, but not herculean effort in compounding those assets over the retirement cycle. We compare that number to what is already saved and that gives us the gross funding gap.
The next step is important because the productive economy of these countries going forward is a key determinant of whether the gap is manageable or a serious problem. The old age dependency ratio estimates we have used incorporate the United Nations population growth forecasts and give us the approximate expected size of the population that must support the funding of that gap as we roll forward. The degree of this burden is clearly a function of economic growth, and we know that economic ...