Current plans to raise the retirement age are not bold enough

70 or bust!

Pensions - 70 or bust! | Leaders | The Economist

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PUT aside the cruise brochures and let the garden retain that natural look for a few more years. Demography and declining investment returns are conspiring to keep you at your desk far longer than you ever expected.

This painful truth is no longer news in the rich world, and many governments have started to deal with the ageing problem. They have announced increases in the official retirement age that attempt to hold down the costs of state pensions while encouraging workers to stay in their jobs or get on their bikes and look for new ones. 

Unfortunately, the boldest plans look inadequate. Older people are going to have to stay economically active longer than governments currently envisage; and that is going to require not just governments, but also employers and workers, to behave differently.

Since 1971 the life expectancy of the average 65-year-old in the rich world has improved by four to five years. By 2050, forecasts suggest, they will add a further three years on top of that. Until now, people have converted all that extra lifespan into leisure time. The average retirement age in the OECD in 2010 was 63, almost one year lower than in 1970. 

 Living longer, and retiring early, might not be a problem if the supply of workers were increasing. But declining fertility rates imply that by 2050 there will be just 2.6 American workers supporting each pensioner and the figures for France, Germany and Italy will be 1.9, 1.6 and 1.5 respectively. The young will be shoring up pensions systems which, as our special report this week explains, are riddled with problems.

Living longer, and retiring early, might not be a problem if the supply of workers were increasing. But declining fertility rates imply that by 2050 there will be just 2.6 American workers supporting each pensioner and the figures for France, Germany and Italy will be 1.9, 1.6 and 1.5 respectively. The young will be shoring up pensions systems which, as our <a href="https://www.economist.com/special-report/2011/04/07/a-nudge-and-a-wink">special report</a> this week explains, are riddled with problems.

Most governments are already planning increases in the retirement age. America is heading for 67, Britain for 68. Others are moving more slowly. Belgium allows women to retire at 60, for instance, and has no plans to change that. Under current policies the mean retirement age by 2050 will still be less than 65, barely higher than it was after the second world war.

Because life expectancy continues to rise—people in rich countries are gaining a little under a month a year—even the American and British plans are inadequate. In Europe the retirement age should be raised to 70 by 2040; America, with a younger population, can afford to keep it a smidgen lower. 

Working longer has three great advantages. The employee gets more years of wages; the government receives more in taxes and pays out less in benefits; and the economy grows faster as more people work for longer. Older workers are a neglected consumer market, as our briefing on the media's ageing audiences explains (see article).

Working longer has three great advantages. The employee gets more years of wages; the government receives more in taxes and pays out less in benefits; and the economy grows faster as more people work for longer. Older workers are a neglected consumer market, as our briefing on the media's ageing audiences explains (see <a href="https://www.economist.com/briefing/2011/04/07/peggy-sue-got-old">article</a>).

Yet too many people see longer working lives as a worry rather than an opportunity—and not just because they are going to be chained to their desks. Some fret that there will not be enough jobs to go around. This misapprehension, known to economists as the “lump of labour fallacy”, was once used to argue that women should stay at home and leave all the jobs for breadwinning males. Now lump-of-labourites say that keeping the old at work would deprive the young of employment. The idea that society can become more prosperous by paying more of its citizens to be idle is clearly nonsensical. On that reasoning, if the retirement age came down to 25 we would all be as rich as Croesus.

Raising the official retirement age is only part of the solution, for many workers retire before the official age. Martin Baily and Jacob Kirkegaard of the Peterson Institute in Washington, DC, reckon that raising actual EU retirement ages to the official age would offset the impact of an ageing population over the next 20 years.

For that to happen, working practices and attitudes need to change. Western managers worry too much about the quality of older workers (see Schumpeter). In physically demanding occupations, it is true, some may be unable to work into their late 60s. The incapacitated will need disability benefits. Others will need to find a different job. But this should be less of a problem than it used to be now that economies are based on services not manufacturing. In knowledge-based jobs, age is less of a disadvantage. Although older people reason more slowly, they have more experience and, by and large, better personal skills. Even so, most people's productivity does eventually decline with age; and pay needs to reflect this falling-off. Traditional seniority systems, under which people get promoted and paid more as they age, therefore need to change. 

For that to happen, working practices and attitudes need to change. Western managers worry too much about the quality of older workers (see <a href="https://www.economist.com/business/2011/04/07/age-shall-not-wither-them">Schumpeter</a>). In physically demanding occupations, it is true, some may be unable to work into their late 60s. The incapacitated will need disability benefits. Others will need to find a different job. But this should be less of a problem than it used to be now that economies are based on services not manufacturing. In knowledge-based jobs, age is less of a disadvantage. Although older people reason more slowly, they have more experience and, by and large, better personal skills. Even so, most people's productivity does eventually decline with age; and pay needs to reflect this falling-off. Traditional seniority systems, under which people get promoted and paid more as they age, therefore need to change.

The huge cost of pension schemes is being dealt with in the private sector. Final-salary schemes are hardly ever offered to new employees these days. In the public sector, however, they are still standard. In Britain the recent report by Lord Hutton made some sensible suggestions for reform (see article). The accrued rights of workers should be maintained but their future pension rights should be based on the state retirement age (many public-sector workers currently retire early) and on a career average, rather than final, salary. That would both prevent abuses and make part-time working easier. 

The huge cost of pension schemes is being dealt with in the private sector. Final-salary schemes are hardly ever offered to new employees these days. In the public sector, however, they are still standard. In Britain the recent report by Lord Hutton made some sensible suggestions for reform (see <a href="https://www.economist.com/britain/2011/04/07/a-simpler-dotage">article</a>). The accrued rights of workers should be maintained but their future pension rights should be based on the state retirement age (many public-sector workers currently retire early) and on a career average, rather than final, salary. That would both prevent abuses and make part-time working easier.

The public-sector pension problem is sharpest in American states. The deficits in their pension funds may amount to $3 trillion. They face legal and constitutional constraints that prevent them from following the British lead. Unlike wages, pension promises have been deemed, weirdly, to be permanent and sacrosanct. But as budget pressures bite, politicians are going to have to change laws and constitutions.

Private-sector workers face a different problem. The demise of final-salary pensions leaves them facing two big risks: that falling markets will undermine their retirement planning, and that they will outlive their savings. So governments should encourage workers to save more, nudging them into pension schemes by requiring them to opt out rather than opt in. And the basic state pension should be high enough to give those unlucky elderly with insufficient savings a decent income, without penalising those who have been thrifty. That is the least people deserve in return for toiling until they are 70. 

Pensions

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70 or bust!

Current plans to raise the retirement age are not bold enough

Leaders April 9th 2011

From the April 9th 2011 edition

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