Published in December 2009 issue of Prospect Magazine
During the second half of the 20th century, the average age of retirement fell in the developed world. At the same time, life expectancy rose. The consequences of these facts for pensions are obvious. If pensions are to keep pace with earnings, then funded schemes need ever-increasing contributions and unfunded, pay-as-you-go schemes require ever-increasing tax rates. Yet it was not until the 1990s that people woke up to this problem.
From the mid-1960s to the mid-1990s, the average age at which British men retired fell from around 68 to around 62. The equivalent ages for women were 66 and 61. The rate of decline was even greater in some European countries. But since the mid-1990s this trend has been reversed in Britain and many other countries—although not in all (notably France).
What lay behind the declines in the retirement age? First, the age for pension receipt was either kept fixed or fell. Second, there were strong financial disincentives to working beyond this age. Third, early retirement incentives were introduced in the mistaken belief that shifting older workers out of the labour force would help with high unemployment. (Except in the very short run, it had no such effect.)
And, since the mid-20th century, birth rates have fallen, which only exacerbates the problem. In the OECD countries, the average number of children per woman fell from 3.2 in 1960 to around 1.6 today. Fewer children means that there will be fewer workers around to pay the taxes required for their parents’ pensions.
So what is the answer to the problem generated by declining retirement ages and fertility, along with increasing life expectancy? The single most important is to make sure that retirement ages keep pace with life expectancy. Roughly speaking, if the proportion of adult life spent receiving a pension is kept fixed from now on, the retirement age in Britain will have to reach 70 by 2050. Earlier or later retirement should not be ruled out, but p…