The OECD’s latest ‘Pensions at a Glance 2017’ report trains its sights on a topic we’re going to be hearing much more about over the next few years: Flexible Retirement.
The trouble with flexible retirement policy making is that it is very difficult to conceive of – and then implement – any sort of scalable or ‘one size fits all’ programme of reforms. Yet reform we must: ‘In the absence of increased (wealth) redistribution, widening inequality on the labour market will eventually result in widening income inequality in old age’, states the report. Defined Benefit pension systems around the world continue to creak under the stresses of increased longevity, low interest rates and investment yields, whilst public sector finances quite palpably won’t support changing demographics beyond the medium term.
Reform doesn't just mean increasing the legislated retirement age or changing indexation. Portability, flexibility and liquidity are the buzz words as the rise of the ‘Gig’ economy, flexible working patterns and other societal changes exert inexorable pressure on the current system. In particular, the impact of technology on working culture such as self-employment and the growth in working from home, shorter life span of corporates, job sharing or more supportive arrangements for returners to work and better diversity initiatives have all given rise to calls for the pension systems of the western world to become less rigid. Increasing the portability, granularity and flexibility of pensions provision and other welfare payments in the modern world should positively impact labour market liquidity – and thus productivity. (As an aside, Zurich Insurance's report earlier in the year, 'The Future of Social Protection Systems' is well worth a read for more thoughts on these gradual changes).
Frustratingly, whilst many workers attest to a desire for more flexibility, take-up rates for pension arrangements which allow for partial working remain stubbornly small: In Europe, about 10% of individuals aged 60-64 or 65-69 combine work and pensions - a figure which has been relatively unchanged over the past 15 years. Moreover, the OECD tells us that the pace of pension reforms has slowed in the last two years, as improving government finances have relieved some of the pressure to reform which was borne out of the financial crisis. The rise of populism is slowing the pace of reform, whilst a comparative rise in public pensions expenditure might be having the effect of diluting a much needed, longer term debate - Greece and Italy, for example, already spend more than 15% of GDP on pensions. Other problems include age discrimination among employers, which remains widespread due to prejudice about older workers’ productivity and their perceived inability to adapt, whilst age-related wage and benefits mechanisms which increase the costs of keeping older workers are still commonplace.
What is needed is root-and-branch reform: ‘Most pension systems are still based on the idea that people enter the labour market after finishing school, find a stable full-time job, often staying with the same employer, and retire from that company around age 65. However, some countries such Canada, the Czech Republic, Finland have changed retirement ages, benefits, contributions or tax incentives…
Few reforms are as contested as raising the retirement age. It is a key marker of when a society finds it normal to stop working and acceptable to draw a pension; it also signals when workers can expect to retire; and it is a threshold for many employers that indicates when their workers are expected to leave their company. Population ageing and financial sustainability concerns have created pressures on policy makers to raise the retirement age, even if most people do not like this. Employment opportunities for older workers are increasing and people are living longer and healthier lives and thus could spend more years in retirement. Nevertheless, there is still strong resistance to higher pension ages in many countries. Why is it so unpopular to work longer even among people with longer life expectancy and in good health?