Governments will need to raise retirement ages gradually to address increasing life expectancy in order to ensure that their national pension systems are both affordable and adequate, according to a new OECD report. At a time of heightened global economic uncertainty, such reforms can also play a crucial role in governments’ responses to the crisis, contributing to fiscal consolidation at the same time as boosting growth.
Over the next 50 years, life expectancy at birth is expected to increase by more than 7 years in developed economies. The long-term retirement age in half of OECD countries will be 65, and in 14 countries it will be between 67 and 69. The Pensions Outlook 2012says that increases in retirement ages are underway or planned in 28 out of the 34 OECD countries. These increases, however, are expected to keep pace with improved life expectancy only in six countries for men and in 10 countries for women. Governments should thus consider formally linking retirement ages to life expectancy, as in Denmark and Italy, and make greater efforts to promote private pensions.
“Bold action is required. Breaking down the barriers that stop older people from working beyond traditional retirement ages will be a necessity to ensure that our children and grand-children can enjoy an adequate pension at the end of their working life,” said OECD Secretary-General Angel Gurría. “Though these reforms can sometimes be unpopular and painful, at this time of tight public finances and limited scope for fiscal and monetary policy, these reforms can also serve to boost much needed growth in ageing economies.”
The Pensions Outlook 2012 finds that reforms over the past decade have cut future public pension payouts, typically by 20 to 25 per cent. People starting work today can expect a net public pension of about half their net earnings on average in OECD countries, if they retire after a full career, at the official retirement age. But in nearly all the 13 countries that have made private pensions mandatory, pensioners can expect benefits of around 60% of earnings.
Conversely, in countries where public pensions are relatively low and private pensions voluntary, such as Germany, Ireland, Korea, Japan and the United States, large segments of the population can expect major falls in income upon retirement.
This could cause pensioner poverty to increase significantly. Later retirement and greater access to private pensions will be critical to closing this pension gap, says the OECD.
However, making private pensions compulsory is not necessarily the answer for every country. According to the report, such action could unfairly affect low earners and be perceived as an additional tax. Auto-enrolment schemes – where people are enrolled automatically and can then opt out within a certain time frame – might be a suitable alternative.
Italy and New Zealand have already introduced such schemes and the UK is set to roll one out in October 2012. However, the report finds that results are mixed, with a major expansion of coverage of private pensions in countries like New Zealand, and having only a small effect in others like Italy.
More broadly, reforming tax reliefs to encourage private pension savings is also needed, as low earners and younger workers are much less likely to have a private pension. Facilitating matching contributions or giving flat subsidies to savers, such as in Germany and New Zealand, would improve their incentives to contribute. To boost confidence in private pensions, governments also need to improve their oversight of funds to ensure that charges are kept low and risks minimised.
This inaugural edition of the Pensions Outlook also includes the first comprehensive evaluation of national Defined Contribution systems, which are now a central feature of many countries’ pension systems. Among other recommendations, the report argues that it is critical to set the minimum or default contribution rate in Defined Contribution systems at an appropriate level.
Contributions to these systems need to be high enough so that together with public pensions they generate sufficient income at retirement. While Australia is moving in the right direction by increasing its contribution rate from 9% to 12%, it remains too low in countries such as Mexico and New Zealand (6.5% and 3%, respectively).
For comment or further information, journalists should contact Juan Yermo of the OECD’s Financial Affairs division (tel. + 33 1 45 24 96 62) or Edward Whitehouse of the OECD’s Social Policy division (tel. + 33 6 25 89 56 67).