Most governments are already planning on increasing the retirement age. America is heading for 67, Britain for 68. It’s a painful truth that many of us will be chained to our desks longer than we ever expected. With people living longer, and poor investment returns, we may have to put aside the cruise brochures and golf clubs for a few more years. Many governments are dealing with this problem by announcing increases in the official retirement age in an attempt to hold down the costs of state pensions. Unfortunately, even the boldest plans look inadequate.
Since 1971 the life expectancy of the average 65-year-old in the U.S. has improved 4 to 5 years. By 2050, forecasts suggest, they will add another three years on top of that. Until now, people have converted all that extra lifetime into leisure time.
Trying, but not hard enough
Living longer and retiring early may not be a problem if there were an increasing supply of workers. In 1950 there were 7.2 people working for each person age 65 or older. By 1980 that ratio had dropped to 4.1. Declining fertility rates imply that by 2050 there will only be 2.6 American workers supporting each pensioner. There won’t be enough young workers to keep the already troubled system going. Economic growth is a function of the size of the workforce, the amount of capital employed and the rise in productivity. If the workforce shrinks, as domography shows it will, all the growth will have to come from capital investment and productivity improvements. In Japan, where the working population is already getting smaller, economic growth has been miniscule, despite a good productivity record. To counteract a shrinking workforce, retirement age will need to be raised.
There are some advantages??
Working longer does have three advantages (if you want to look at it that way). 1. The employee gets more years of wages and can save more money. 2. The government receives more in taxes and pays out less in benefits. 3. The economy grows faster as more people work longer. Yet many people worry that if workers stay longer, there won’t be enough jobs to go around. Others have concerns that older workers aren’t as productive as younger workers. But in a knowledge based job, this isn’t as big of an issue. Older workers have more experience and, by and large, better personal skills. Even so, pay will need to reflect productivity. Traditional pay based on job seniority and time on the job will likely need to change.
In the private sector, the pension problem is being dealt with. Rarely are new employees ever offered a pension anymore. But in the public sector, pensions are still a common benefit for most. The deficits in our public pension system here in America amount to $3 trillion. Legal and constitutional constraints prevent the government from changing what has already been promised. But as this problem worsens, politicians are going to have to do something to change laws and constitutions.
I would welcome your comments on possible solutions to this increasing the retirement age issue.