The longevity risk and the consequences of population aging worldwide

The decrease in mortality rates that has grown faster as of the second half of the twentieth century is still progressing at a high rate, while medical breakthroughs are producing a new risk related to life expectancy: longevity risk.

This hazard has been defined as a financial risk involving individuals who live longer than expected. This risk represents a major stake on the social as well as on the economic level.

Longevity risk worldwide and its several consequences

The longevity risk that some people consider to be systemic will profoundly alter the health system and pension plans. The expenses incurred from citizens’ longevity are straining the finance of the States that are struggling harder and harder to face this phenomenon.

Moreover, shrinking working population and the emergence of structural unemployment are widening the gap between income/expenditure items for both public and private pension funds.

According to PriceWaterhouseCoopers, (PwC), global population aged over 60 is expected to go threefold by 2050, triggering huge demand for retirement pensions. The middle class is poised to rise from 430 million to 1.2 billion people by 2030. States as well as insurance companies will be on the frontline for the coverage of this new kind of risk.

Old age dependency rates worldwide

Old age dependency rate showcases the ratio between the number of retired people and that of people of working age. This ratio is designed to give an overview of the financial charge that is likely to play out in the future when covering retirement pensions of elderly people.

Ageing population is more of an issue in developed countries endowed with mature economies. It is in these countries that we currently note the highest dependency rates. For instance, old age dependency rates in Japan in 2015 were above 45%. This rate is poised to rise to 55% by the end of the next fifteen years.

Evolution of old age dependancy rates: 2008-2030

Source: United Nations Department of Economic and Social Affairs

The longevity risk: the case of Japan

Japan is sustaining a decrease of its population which is the oldest worldwide. Where the risk of longevity is strongly marked. In 2014, 26% of the Japanese were over 65.

The aging of the population in this country is higher than that of any other nation. It is accounted for by a decline in fertility rates and by rising life expectancy. This situation has had an impact on labor with a shortage in young workforce.

Established in 2006 by the Japanese government, the Government Pension Investment Fund, (GPIF), is an independent institution considered as the largest pension establishment in the world. By March 31, 2015, GPIF’s assets amounted to 1 134 billion USD. Sizable capital has been invested by this fund with renowned insurance corporations such as AXA, Tokio Marine, Prudential, etc.

In an effort to tackle the risk of depletion of its financial resources, GPIF is currently examining the prospect of transferring longevity risk to reinsurers as is now the case in both the United States and United Kingdom.

Ageing population in Japan: 2010-2050 period

During the recent five years, the number of the elderly who are over 65 has increased by 4 755 000 people. In 2050, Japan will have more than 40 million citizens aged over 65.

In addition to this increase of the population aged over 65, the number of people under 14 is shrinking. It is poised to decrease from 20 million in 2010 to 9 million people by the next 40 years. It is worth noting that with 1.4%, Japan has the lowest birth rate worldwide.

In thousands

Source: Statistics Bureau of Ministry of Internal Affairs and Communication du Japon (www.ipss.go.jp)