The idea of raising the retirement age is not popular – most people resent being told they must work for longer. But with life expectancies increasing and people enjoying higher quality of life at older ages, we face the prospect of older people being retired for the same amount of time as they were working, or longer.
Our research supports the decision to raise retirement ages, but also shows how we can stop relentlessly raising retirement ages by maximising the workforce available in younger generations.
According to conventional thinking, pension ages have to go up because there is not enough money in national budgets to continue the current level of benefits that pensioners receive. This is a very unpopular argument and for good reason.
If the desired policy was to maintain a constant pension age, then there are many ways to do this, from reducing less valuable programs to increasing the efficiency of government services or raising taxes. Increasing pension ages simply because pension programs are growing more expensive is like deciding that students should have less education because schooling is becoming more expensive.
But, a continuation of current demographic trends suggests that 75-year-olds in the future could have the same remaining life expectancy, health, and other characteristics of today’s 65-year-olds. When we realise this, it seems appropriate to modify the normal pension age in order to not encumber younger generations with an ever heavier burden of supporting their elders.
Flexibility is key
But retirement age should not just be uniformly raised. We cannot tell whether populations are ageing or not just by looking at the fraction of people over the age of 65. We must examine the characteristics of people and policies should be made accordingly.
Pension payments are normally adjusted for price changes. What is needed is some form of flexibility of the retirement age that takes into account changing life expectancies. If life expectancy is longer, retirement should be later and vice versa if shorter – there is no need for an arbitrary figure that determines when everyone should retire.
We would broadly agree with the Australian government’s recent decision to raise the retirement age to 70, to take into account the fact that their life expectancy is now 85. But this shouldn’t necessarily be implemented across the board.
To allow for this flexibility, it’s important to increase the number of people working who are able to do so. Our research indicates that a one to two percentage point increase in the average number of people working can spread the burden of tax across working adults and allow one year to be taken off the normal pension age.
This can be done through eliminating arbitrary restrictions that mean people have to leave the labour force when they would actually like to carry on in their jobs, supporting the retraining of older workers, helping people with young children remain employed, changing disability rules so that partially disabled people can work while receiving some benefits and through many other policies.
Increasing the number of people working this way is not only good for the economy, but would prove popular too by giving people jobs who want them.
As older people live longer and become healthier, the policy challenge is to give them the flexibility of being productive as long as they wish. Reducing restrictions on people who would otherwise want to work is a win-win policy. It provides people with more options and, at the same time, it reduces the need for large increases in the pension age.
Policy debates miss two important elements when it comes to increasing pension ages. First, they do not have to make the poor worse off if benefits are adjusted at the same time. Second, increases in pension ages should not be addressed in isolation. Increasing the number of people working through other measures should be done at the same time. A better way to discuss pension age increases is to address it in the context of finding the best policy mix, involving pension ages, labour force participation and the progressiveness of the pension benefit schedule.
Healthily ageing populations
The debate over retirement ages is often framed in the context of coping with the challenges of an ageing population. But, despite the numerous graphs showing skyrocketing fractions of populations above the age of 65, we have to question the idea that populations are ageing. The problem with these graphs is that they categorise everyone as “old” when they reach their 65th birthday.
But 65-year-olds half a century ago are not the same as they are today, nor are today’s 65-year-olds the same as they will be half a century hence. 65-year-olds in the future will live longer, be healthier, and more educated than they are now. This is good news. But we need not get in a panic about ageing populations and implement the policies to reflect them.