Longevity and Public Policy: Ad Hoc Responses or Structural Reform?

Dalmer Hoskins

International Federation on Ageing Prague, 2012

Pension Reform at a Crossroads

• Longevity is driving pension reform:

Men: + 7.9 years of added life by 2050

Women: +6.5 years of added life by 2050

• “Savings” of recent benefit cuts could be wiped out by longevity

Falling birthrates and shrinking

labor force

• In OECD countries, labor force will drop from 4 workers for 1 pensioner to 2 workers by 2050

• Most dramatic increases in life expectancy will be in developing countries, China and India

0

5

10

15

20

25

30

France Ireland Switzerland U.K. U.S.

# o

f Y

ea

rs

Country

Life expectancy after pensionable age in selected OECD countries, men

1958

2010

2050

Source: Pensions at a Glance 2011, OECD

Acceleration of pension reform

• Fiscal pressures have forced governments to tackle pension reform: Greece, Hungary, Italy, Spain, etc.

• Globalization of pension reform: financial markets react to national pension issues

• Pension reform is not just changing the law, but also changing human behavior (work, savings, and family)

• The issue for 2050: Rising poverty and income inequality among the elderly

• Extension of public pension coverage is stalled in the developing world

Lessons learned from pension reform:

The search for new solutions:

• Privatization of old-age pensions is not the

magic bullet

• Raising social security contributions is mostly off the table (15-20% of earnings and no more)

• Traditional social security models may not work in developing economies

Option I: Strengthening the long-term solvency of the public retirement program

• Link the retirement age (not benefits) to increases in life expectancy (single most effective tool)

• Encourage workers to stay in the labor force longer

• Discourage early retirement

Will countries prefer the ad hoc

approach or restructuring their

retirement income security?

Option 1 (continued)

• Equalize pensionable age between men and women.

• Support the development of complementary retirement savings

• Improve government capacity to collect taxes, maintain records and pay benefits as promised

Option 2: Shift retirement savings gradually from the public purse to the individual, but what works?

• Mandatory second-pillar coverage: Australia, France, Switzerland, Netherlands

• Voluntary tax deferred retirement savings (Canada, USA, Ireland and most of Asia and L.A.)

• Government matching of retirement savings (Germany, New Zealand)

Ad hoc or structural reform?

Option 3: Coherent strategies to alleviate old-age income poverty

• Social pension/social floor advocated by UN,WHO and ILO: What is the retirement future for 3/5 of the world’s population?

• Minimum benefits for all pensioners

• Will this century see re-emergence of poverty among the elderly as a political issue around the world?

Ad hoc or restructuring?:

• Is the current economic crisis an opportunity or a barrier to addressing long-term retirement reform?

• Do we see evidence that the political leadership can reframe the “social contract” for an aging population?

What is the public understanding of

longevity increases/demographic

aging?