The world's pension systems are confronting a demographic crisis as longer lifespans and dwindling birth rates threaten to stretch retirement finances, raising questions about their ability to sustain payouts for future generations.
Pension offerings generally fall into two categories: defined-benefit plans, which promise retirees a predetermined income, and defined-contribution plans, where payouts depend on accumulated savings and investment returns.
Ageing poses different challenges for the two systems: defined-benefit schemes face mounting liabilities as retirees live longer, while defined-contribution members risk outliving their savings, placing greater pressure on funds' investment performance.
The problem is "huge, and it's gotten more pronounced over time,” said Sebastien Betermier, executive director at the International Centre for Pension Management, noting that some pension funds have members who have been retired for nearly half a century, aged 107 or 108.
"The higher the longevity, the more years the pension funds have to cover, and so that immediately comes in as an additional liability," he said. "Think about the cost that it imposes actually on the next generation … it is a ticking time bomb," Betermier told CNBC.
The scale of the challenge is laid bare in the 2026 Marsh CFA Institute Global Pension Index, or MCGPI, report published Tuesday last week. Of the 55 pension systems covered by the index, 43 have fertility rates below the replacement level of 2.1 children per woman, while 23 have rates below 1.5.
Meanwhile, life expectancy at age 65 in more developed regions has increased by 50.9% since 1950 to about 20 additional years, meaning retirement benefits must now last considerably longer. The number of potential workers supporting older people is also set to decline sharply.
“The funding of future pensions and aged care both become more critical as the ratio of workers to retirees continues to decline,” the MCGPI report stated. “Very few systems, as they currently operate, are secure.”
The problem is particularly acute for pay-as-you-go pension systems in which contributions from today's workers largely fund benefits for current retirees, leaving them especially vulnerable to a shrinking workforce.
The pressures are already evident in the U.S., where the Old-Age and Survivors Insurance Trust Fund, which finances retirement and survivor benefits for tens of millions of Americans, is projected to exhaust its reserves in the fourth quarter of 2032, according to its latest trustees' report.
Fully funded pension schemes, which invest contributions from workers and employers to finance future retirement benefits are not immune either.
As their members retire and begin drawing down benefits, some funds could find themselves paying out more than they receive in fresh contributions, forcing them to rethink their investment strategies and liquidity needs, MCGPI cautioned.
“Future benefit outflows will exceed the level of contributions or premiums ... this financial strain will inevitably grow in the future,” the report highlighted.
Rethinking risk
The demographic crunch is reshaping how pension funds invest, with some taking on greater risks to generate the returns needed to meet growing retirement obligations.
Many mature funds are already paying out more in benefits than they receive in contributions, forcing them to rely increasingly on investment returns and accumulated assets.
In Australia, about a third of superannuation funds recorded negative natural cash flows from assets over a three-year period, meaning benefit payments exceeded contributions, according to a 2025 report by the Australian Prudential Regulation Authority.
Industry watchers say the pressure to generate higher returns has pushed some funds toward riskier and more complex investments, including private equity, infrastructure and private credit.
"You can try to earn higher returns on your investments, but that's going to require taking on greater levels of risk," said Betermier.
Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College, said pension funds were increasingly shifting toward riskier investments, although the extent varied considerably across markets.
"I think everybody is shifting a little more risk where they can. The costs are going up with this demographic shift," Aubry said.
He pointed to U.S. state and local government pension funds, which hold only about 20% of their assets in bonds, with much of the remainder invested in equities and private assets.
Such allocations make U.S. public pension funds considerably more exposed to investment risk than their counterparts in Europe and Canada, he said.
Not every pension manager sees ageing as a reason to take bigger bets.
David Elias, CEO of Australian pension fund Hostplus said demographic changes were only one of many factors shaping investment decisions.
He stressed the importance of maintaining a diversified portfolio across asset classes, geographies and industries, while ensuring that potential returns adequately compensate for the risks involved.
Elias also said that governments could find ways to mitigate the pressures of ageing populations, including through immigration policies and technological advances, while demographic shifts themselves could create new investment opportunities.
"I don't underestimate governments being incredibly creative in terms of dealing with these types of issues," he said. "You know, but they're going to have to address it, no doubt about that."
