Demography is Destiny
What to do with retirement?
by Marcus Roberts | November 24, 2018
The difficulties of paying for retirees in the near future are becoming more and more apparent for governments around the world. Lifespans are generally increasing throughout the world, meaning that the amount of time each person can be expected to spend in retirement is increasing. At the same time, fertility rates are declining meaning that the number of workers coming through the system to pay taxes to support pensions and medical care for the elderly is decreasing. In short, we cannot assume that retirement will be affordable in the future in the same way it is now.
This is the thrust of this piece in the YaleGlobal Online by Joseph Chamie, a former Director of the United Nations Population Division. He argues that the pension programs adopted throughout much of the western world in latter part of the nineteenth century have failed to adapt to our ageing population. When they were introduced, most pension ages were set to begin after the life expectancy of the population that they were serving. Thus, in the United States: the official retirement age under the 1935 Social Security Act was 65 years when it was passed into law, the life expectancy at the time for American males was only 60. But as the average life expectancy for those reaching the age of 65 has increased over the last 50 years or so (in Japan the life expectancy of someone reaching 65 has increased by nearly ten years, in the USA, nearly six years, worldwide it has increased by five years), the pension age has generally not been lifted at the same rate. And this problem of cost will only get worse. By the middle of the century a large number of particularly industrialised nations are expected to have a third of their population over the age of 65: for example China, Germany, Japan, Iran, Italy and South Korea.
So what can governments do about it? How can retirement schemes be made more affordable? Some nations index their retirement age to average life expectancy (Denmark, Finland, Italy, Portugal and the Netherlands) but this can disadvantage certain groups below the average age: those in physically demanding occupations and men are the two obvious such groups. Other options include reducing the amount paid under a pension, or increasing taxes while keeping the pension cost the same. Neither of which are politically appealing. Instead one can always kick the can down the road and leave it as a problem for someone else to deal with in the future. Furthermore, private pension schemes are changing: defined-benefit schemes are seen to be “outdated” by many businesses and are being replaced by schemes which have a defined contribution instead. This of course places the risk of market downturns on the worker rather than the company. In short, people working now should not expect to be retiring at the same age, or with the same benefits, as their parents did. We simply cannot afford it.