Higher Retirement Age not All That’s Needed to Address Longevity

May 13, 2011 (PLANSPONSOR.com) - Recent reforms will still be insufficient to cover increased pension costs in the future, despite increases in retirement ages in half of Organisation of Economic Co-operation and Development (OECD) countries.

According to a new OECD report, Pensions at a Glance 2011, by 2050 the average pensionable age in OECD countries will reach 65 for both sexes. This represents an increase of about 1.5 years for men and 2.5 years for wome, but life expectancy is rising even faster, outstripping the increase in pension ages by about 2 years for men and 1.5 years for women. This means that in all but five OECD countries the time spent in retirement will continue to grow. 

“Higher pension ages are only part of the answer,” said OECD Secretary-General Angel Gurría, in a press release.  “Countries need to do more to fight discrimination, to provide training opportunities for older workers and to improve their working conditions. This would help employers adapt to a greyer workforce.”    

Encouraging people to invest more in private pensions is also key, according to the report. Some countries, such as Germany and New Zealand, for example, have successfully broadened coverage of private retirement provision. Ireland and the United Kingdom are also taking innovative steps in this direction.   

Public pensions are the cornerstone of old age incomes today, accounting for 60% on average. The other 40% is made up almost equally of income from work and from private pensions and other savings. As public benefits are reduced through reforms, these other two sources will need to fill the gap, OECD says.  

The report also suggests governments consider the impact of benefits cuts on the most vulnerable. Pension reforms in OECD countries since the early 1990s have reduced further benefits on average by 20%. In Germany, Japan, the United Kingdom and the United States, for example, workers on low wages only get pensions worth around half of their previous earnings, OECD contends.  

According to the report, reforms that reduce public pension spending should protect the most vulnerable – low earners and people with interrupted careers – from the full force of benefit cuts, as has been done in Finland, France and Sweden. Australia and the UK have increased benefit levels for low-income retirees.  

“Further reforms are needed that are both fiscally and socially responsible,” said Gurría. “We cannot risk a resurgence of old-age poverty in the future. This risk is heightened by growing earnings inequality in  many countries, which will feed through into greater inequality in retirement.”  

More information is at http://www.oecd.org/document/20/0,3746,en_2825_497118_42992113_1_1_1_1,00.html.