The Pension Crisis: Raise the Retirement Age?

Will raising the retirement age hold off a pension crisis?

In the US, the pension deficit amounts to $3 billion. 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.

Will raising the retirement age hold off a pension crisis?

In the US, the pension deficit amounts to $3 billion. 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.

Demography and declining investment returns are conspiring to keep workers at their desks for longer than they expected. As more governments around the world work to deal with the aging problem, increases in official retirement ages attempt to keep the costs of state pensions down.

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.

The Economist reported:

[quote]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 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.[/quote]

Infographic: The Pension Crisis

It seems the root cause keeping people at work longer rising life expectancies. Nations with younger populations like the US can afford to keep their retirement ages lower, but for how long?

However, working longer does have its 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.

So working longer can be a big opportunity, though many still fear the threat of less employment opportunity and rising unemployment. And will older workers be given a fair go in the workplace?

Working practices and attitudes need to change. Western managers worry too much about the quality of older workers. 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.