By 2025, one in five Europeans will be more than 65 years old, up from 16 percent in 2002.¹ Across the continent, the number of working-age citizens will stagnate or shrink while the number of retirees explodes (Exhibit 1). As a result, household financial wealth, which had enjoyed steady, healthy growth during past decades, will slow drastically over the next 20 years, according to new research by the McKinsey Global Institute (MGI). The slowdown will leave households in three of Europe's biggest economies—the United Kingdom, Germany, and Italy—with a total of more than $4 trillion less than they would have accumulated if historical growth rates had persisted (Exhibit 2).² Around the world, the picture is similar.

If left unchecked, the slowdown in savings and in the accumulation of financial assets by Europe's wealthiest countries could depress investment and economic growth, causing living standards to rise much more slowly. But the economic impact of aging populations could be blunted by raising the savings rates of governments and households and by increasing...