Global governments will need to raise retirement ages gradually to address increasing life expectancy in order to ensure national pension systems are both affordable and adequate, according to a report from the Organisation for Economic Co-operation and Development (OECD).
Over the next 50 years, life expectancy at birth is expected to increase by more than seven years in developed economies. The long-term retirement age in one-half of OECD countries will be 65, and in 14 countries it will be between 67 and 69.
Increases in retirement ages are underway or planned in 28 of the 34 OECD countries, said Pensions Outlook 2012. 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, therefore, consider formally linking retirement ages to life expectancy, as in Denmark and Italy, and make greater efforts to promote private pensions, said OECD.
“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 grandchildren 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 aging economies.”
Reforms over the past decade have cut future public pension payouts, typically by 20 per cent to 25 per cent, said the report. People starting work today can expect a net public pension of about one-half of 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 per cent 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, said OECD.
However, making private pensions compulsory is not necessarily the answer for every country. Such action could unfairly affect low earners and be perceived as an additional tax, said Pensions Outlook 2012. 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 United Kingdom is set to roll one out in October 2012. However, results are mixed, said OECD, with a major expansion of coverage of private pensions in countries such as New Zealand but only a small effect in others such as 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, as in Germany and New Zealand, would improve their incentives to contribute.
To boost confidence in private pensions, governments also need to improve the oversight of funds to ensure charges are kept low and risks minimized, said the report.
Highlights of the report are available at www.oecd.org/daf/pensions/outlook.
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