How to Make Pensions Sustainable and Socially Meaningful
by Monika Queisser
Pension reform is one of the most difficult and politically charged areas of social policy. This is true not only in the United States, where social security has been called the "third rail of American politics" – touch it and you die –, but also in many European countries. Changing the rules of retirement, such as pension ages and benefit levels, is unpopular and a tough sell for governments; raising pensions and allowing people to stop working earlier, by contrast, is a good way to make friends and builds support among an ageing electorate.
But these are hard times to be generous. Economic recovery remains sluggish in most OECD countries and many governments are still under serious fiscal pressure. Spending on pensions is one of the largest items in public budgets and not reforming retirement income systems is therefore no longer an option.
As shown in our most recent edition of Pensions at a Glance about half of OECD countries have indeed taken measures to make their pension systems financially sustainable. Benefits were mostly reduced by switching to less favourable indexation but in general pensions were not cut in absolute terms. On the revenue side, taxes and contribution rates going to pension systems were also often raised. At the same time, about one-third of countries sought to improve the adequacy of retirement incomes for poorer groups of retirees to ensure that reforms do not result in higher old-poverty.
The numbers show why pension reforms are needed: The average number of expected years in retirement has increased from 11 for men and 15 for women in 1970 to 18 and 22, respectively, in 2014. This is, of course, fundamentally good news for older people. But at the same time, fertility rates have fallen below replacement level in 32 out of 34 OECD countries, clearly illustrating the challenge to keep spending manageable for younger generations while at the same time ensuring adequate protection for the retired.
Therefore, despite political resistance, countries have been raising the pension age, closing down ways to retire early, and making it financially more attractive to work longer. Retirement at 67 is becoming the new 65 in many countries. Several countries are planning to move towards 70, including the Czech Republic, Denmark, Ireland, Italy, and the United Kingdom. On average across the OECD, the statutory retirement age will increase from 64.0 to 65.5 based on current legislation.
What matters for pensions, of course, is not the official retirement age but the age at which people actually leave the labour market for good. Here too the trend is upward: Since the early 2000s, effective retirement ages have been rising steadily, especially for women. And employment rates of 55 to 64 year olds have increased sharply: from 45 to 66 % in Germany, for example, from 31 to 46% in Italy and from 52 to 57% on average across the OECD.
Today, most OECD pensioners enjoy as good living standards as the average population. This is not surprising: many of today’s retirees, at least men, have worked for most of their active years in stable jobs which earned them good pensions. But a "job for life" and even a “career for life” are rare commodities for people starting out today. Unemployment, especially among youth, remains very high in many countries, as does long-term unemployment among older workers. Fewer jobs with open-ended contracts and more temporary and often precarious jobs are also cutting into future pension entitlements.
Some countries need to re assess their safety nets for pensioners who have not contributed enough for a minimum pension. Across the OECD, these provide 22 % of average earnings on average, ranging from 6 % in Korea to 40 % in New Zealand. Most countries also index their first-tier pensions to prices, so their value compared to earnings declines over time, as prices tend to increase less than wages. Price indexation is attractive to governments facing budgetary constraints but also runs the risk of fuelling pensioner poverty as safety nets will lose value over time.
As the OECD marks the tenth anniversary of our series on pension systems and retirement incomes we remind policy makers of the risks and the rewards of sound retirement policies. We remind them that pension systems must be financially sustainable to be socially sustainable—but that they must be socially meaningful to matter.
About the author: