A right to work counts among basic human rights, but retirement goes
unmentioned. Nevertheless, government-sponsored pensionable retirement has
evolved into a popular social institution worldwide, especially in
industrialized countries. Statutory retirement ages are in flux around the
globe and public protests in Russia, the United Kingdom, France, Australia, Croatia, Iran, Belgium and elsewhere attest to the centrality
of retirement programs to societal wellbeing and poverty reduction among the
elderly.
Governments introduced pension programs for
workers near the start of the 20th century. Until then workers
toiled until death or disability, and this remains largely the case for workers in less
developed countries. Statutory retirement ages of the earliest national
programs were typically greater than life expectancy at birth. In the United
States, for example, when the 1935 Social Security Act was adopted, the
official retirement age was 65 years while life expectancy for American males
was under 60 years.
Today most
governments have established pensionable retirement programs or social security
providing financial support to many elderly men and women. Many programs are
based on the three-legged stool of government
benefits, employer-provided pensions and personal savings – all of which face
serious challenges.
Retirement programs, similar in
purpose, differ considerably in scope, coverage, contributions,
requirements, taxes, eligibility and benefits. Official retirement ages, for example, range
from 50 to 70 years, with most concentrated between 60 and 65. Although women
typically live longer than men, the statutory
retirement age for women in Argentina, Austria, Brazil, Chile, China, Iran,
Israel, Poland, Russia, Turkey and the United Kingdom is lower than men’s.
With countries
worldwide experiencing population aging, government-sponsored
retirement programs incur increased costs in response to growing proportions of
retired older persons. In turn, those demographic changes challenge the
long-term sustainability of retirement
programs. Marked increases in proportion of the population aged 65 years and
older are expected to continue, particularly among industrialized countries.
Some countries, such as China, Germany, Japan, Iran, Italy and South Korea, are
projected to have people aged 65 years and older account for about a third of
their populations.
Increased longevity
results in more years available for retirement, again translating into
increased costs. Since the middle of the 20th century, average life
expectancy at age 65 years for the world has increased by more than five years.
In some countries, such as Australia, China, France, Italy, Japan and South
Korea, the increase in life expectancy at 65 during the past half-century has
been more than seven years. A notable exception to this global longevity trend
is Russia, where unfavorable health conditions have increased life
expectancy at age 65 by only two years.
Many
retirement programs are underfunded. In response to the
rising costs of aging populations, longer periods of retirement and fewer tax-paying workers per
retiree, governments are adopting steps to reduce obligations and improve the
financial sustainability of retirement programs. Public opposition greets
government plans, including in most high-income OECD countries, to delay retirement
by gradually increasing statutory retirement ages.
Some countries,
including Denmark, Finland, Italy, the Netherlands and Portugal, index official retirement ages to
life expectancy. Again, widespread resentment greets such proposals as life
expectancies vary across occupations, incomes, educational levels and race as
well as between men and women.
In the Netherlands, many support early
retirement for workers in physically demanding occupations, which tend to have
lower life expectancies. In the United Kingdom higher educational attainment translates
into longer survival rates for those 65 years and older. Women’s life
expectancy at age 65 in Japan continues to be about five
years more than men’s. Life expectancy at birth in the United States also
varies markedly by sex and income. Life expectancies of American women are
approximately five years greater than those of men across major racial groups,
with the highest and lowest life expectancies observed among Hispanics and
blacks, respectively. Greater differences in life expectancy at birth are
observed between rich and poor regions of the United
States – from 87 in affluent parts of Colorado to 66 on Native American
reservations in South Dakota.
Governments also
try reducing pension retirement
benefit by switching to less favorable indexation. The United States, for
example, changed inflation measures
for US social security payments in 2000 to cost-of-living allowances based on
the Consumer Price Index for Urban Wage Earners and Clerical Workers, reducing
buying power of the monthly benefits.
Governments also
increase taxes or redirect taxes from other government programs – the least
popular approach. Politicians tend to postpone addressing costly
long-term problems, such as retirement obligations, and younger taxpayers are
reluctant to pay additional taxes for a far-off retirement that they may never receive.
Increasing taxes is difficult to implement in countries where population aging
and low birth rates result in fewer tax-paying workers per retiree. In South
Korea, for example, the number of workers per retiree has fallen from 10 in
2000 to about five today and is projected to decline to two by 2035.
Private-sector
retirement plans have also changed markedly, in turn influencing public-sector
practices. Traditional defined benefit pension plans have declined in many countries. In the United
States, for example, the proportion of private-sector workers with a
defined-benefit pension declined from close to 90 percent
in 1975 to around 30 percent today. Surveys of multinational corporations
report that defined-benefit pensions are considered outdated. Less costly, less risky
defined-contribution pension arrangements are the preferred alternative for
companies and even workers.
Long
lifespans, insufficient personal savings and risky old-age pensions require
many elderly to work past the age they had expected to retire. In Japan, New
Zealand and South Korea, for example, a third or more of the men aged 65 years
and older remain in the labor force.
In sum, inescapable
demographic trends and financial realities coupled with the troubling state of
government affairs pose significant consequences for retirement programs:
Higher
retirement age: With the goal of reining in rising costs, official
retirement ages, including early retirement ages, are
gradually being raised. Many governments want men and women to delay retirement
until their late 60s or older.
More taxes
for retirement pensions: With population aging, increased longevity and fewer
workers per retiree, many governments must increase taxes or redirect tax
monies from other programs to pay for rising retirement costs.
Transition
to defined-contribution pensions: Private- and
public-sector employers are moving from traditional defined-benefit pension arrangements
to defined-contribution pension plans, thereby shifting financial risks from
employers to workers.
Insufficient
savings: Despite repeated warnings, most older workers have not
saved enough for retirement. The
challenge grows with increasing longevity. In addition, most workers lack the financial skills to make informed
decisions about investing limited savings for sustainable retirement income.
Reduced
retirement benefits: Benefits are likely to be reduced by adjusting inflation
indexes, income thresholds, work requirements, means testing, surtaxes or
eligibility.
Working
longer: Working longer is the likely future for many men and
women, especially those with limited savings. Many workers will find themselves
working well past the age they had expected to retire, some to stave
off poverty.
More changes are
anticipated for retirement programs, and nearly half of today’s workers and
retirees worldwide expect future retirees to be worse off than those currently
retired with some concluding they cannot afford to retire. Ongoing trends
justify these disquieting assessments.
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