PensionReforms' summary and comments
Populations throughout the world are ageing.  In most developed countries the 'age dependency ratio' (the proportion of the population over age 65 relative to those aged 16-84) is expected to double.  That has significant cost implications so people worry about the sustainability of pension and health systems and about citizens' lack of preparedness for the consequences.  This is all on the basis that things continue much as they are in other regards.

The report wonders whether we are measuring these things correctly.  Focusing on chronological age misses some things that matter.  How old a person isn't as important as how long the person is expected to live from the age at which they stop working.  That will drive considerations of saving adequacy at an individual level and it will also inform public policy discussions relating to income adequacy.

"The current practice of measuring age as years-since-birth, both in common practice and in the law, rather than alternative measures reflecting a person's stage in the lifecycle distorts important behavior such as retirement, saving, and the discussion of dependency ratios.  Two alternative measures of age have been explored, mortality risk and remaining life expectancy.  With these alternative measures, the huge wave of elderly forecast for the first half of this century doesn't look like a huge wave at all. By conventional 65+ standards, the fraction of the population that is elderly will grow by about 66 percent. However, the fraction of the population that is above a mortality rate that corresponds to 65+ today will grow by only 20 percent. Needless to say, the aging of the society is a lot less dramatic with the alternative mortality-based age measures."

Over recent decades, the average expectation of life at the State Pension Age has been increasing and that is expected to continue.  Some countries are looking at setting their State Pension Age in relation to expectation so that the length of time the pension was expected to be payable was more stable: what the report calls "Remaining Life Expectancy".  The report suggests it is time for the US to think about this.

The report notes that measuring labour force participation rates by age has disguised the real story in the US, for men at least.  In 2005, men are retiring 2.5 to 3 years earlier than in 1965 but, allowing for improved mortality, men are actually spending about six years longer in retirement than in 1965 - an increase of nearly 50%.  In fact "[t]he expected length of retirement of men increased from approximately two years in 1900 to about 19 years in 2000."

Having more older people working helps in all sorts of ways.  Not only will there be the economic contribution they will make (output, taxes, social security contributions, where relevant) there will be a longer working period to build the needed retirement savings.  Also, PensionReforms suggests, future older workers are likely to be healthier overall than today's retirees at similar ages.  Besides which, given a choice, older people seem to prefer at least some work.

"If labor force participation were to remain as it is today with respect to remaining life expectancy (i.e. if the length of retirement stayed where it is today) rather than labor force participation remaining fixed by conventionally-defined age, then there would be 9.6 percent more total labor supply by 2050 in the United States."

The report notes that it is not just the 'normal' State Pension Age that would need re-definition.  In the US, people can start their Tier 2 pension earlier.  There are also age-related conditions on Tier 3 saving schemes.  Those kinds of ages will also need to be 'indexed' to improving mortality.

"It is my opinion that the allocation of the extra lifetime in the 21st century cannot and will not continue the pattern of the 20th century - namely all extra adult lifetime is taken as retirement.  Even average retirement ages today look like early retirement when age is measured by remaining life expectancy or mortality risk.  In order to allow people to choose when to retire without encouraging an early departure from the workforce, many ages in the laws should be indexed for demographic changes. It is time to consider a new way to measure age."

PensionReforms agrees with this.  The US is increasing the State Pension Age but at a glacial rate.  It seems appropriate to start a proper discussion about an appropriate length of retirement.

The report describes a number of design aspects of the US Tier 2 scheme that bias decisions to early, rather than late retirements.  Those need to be addressed as well.  PensionReforms suggests that moving away from contribution and pay-related benefits would help.

In fact, the number of retirees isn't as important as the number of people who depend on the tax-financed pension (including US "Social Security") and who have few economic choices.  Those are the people for whom the state has the most pressing financial obligation.  The age from which people cease engaging in their career jobs should be seen as the start of the transition to retirement and eventual dependence on state-provided benefits and private 'unearned' income.  As the report suggests we need to widen conventional discussions from the focus on the State Pension Age.  (File size 118 KB;  22 pp) 317