Retirement-savings plans destroy existing pensions.

Ageing poses a serious challenge to OECD countries, in particular, how to pay for future public pension liabilities. And early retirement places an unsustainable burden on pension financing. There is no easy solution, but delaying retirement could help. Retiring early has become so ingrained in OECD countries that these days it is almost an individual professional goal. It is even possible to drum up economic arguments in its favour: retirees spend money rather than save it, for instance, and are valuable for such sectors as tourism. Retiring early, some argue, frees up jobs for younger recruits and helps to boost productivity. To many, retirement is a hard-earned right, and so the earlier the better. Indeed, futurists have been telling us for years that early retirement would become the norm, that thanks to labour-saving technology we would soon be spending more of our lives at play and less at work. All very well, but the reality is quite different. Early retirement may seem like a worthy individual goal, but it is a socially expensive one, and, as far as public pensions are concerned, quite unsustainable. The essential reason is that more people are retiring early and living longer. That means more retirees depending on the funding of those in work for their income. The outlook is worrying. In the next 50 years, low fertility rates and rising life expectancy in OECD countries will cause this old-age dependency rate to roughly double in size. Public pension payments, which pay 30-80% of total retirement incomes in OECD countries, are expected to rise, on average, by over three percentage points in GDP and by as much as eight percentage points in some countries. Such is the pressure on pension funds that there is a danger of today’s workers not getting the pensions they expected or felt they paid for. Action is needed, but simply aiming to reduce the generosity (and cost) of public pensions, or trying to augment the role of privately funded pensions within the system, though necessary steps, may be insufficient to deal with the dependency challenge. After years of advancing early retirement schemes to avoid redundancies and higher unemployment, many governments are now looking at persuading people to stay in work until they are older. Surely, the thinking goes, if we are healthier now and jobs are physically less strenuous and unemployment is down, then perhaps the present rate should rise anew. In fact, increasing the participation rate of persons aged 55 to 64 years is one of the main objectives of social policy within the European Union under the Lisbon and Amsterdam Treaties. The approach makes economic sense. For a start, as long as the extra labour resources from delayed retirement are put to work, then in theory the level of GDP will rise, thereby increasing the resources available for consumption. This is simplistic of course: having more old people at work is not enough to improve productivity. Indeed, some contend that the level of GDP could fall, since retiring early acts as an incentive to work hard and save more and so boosts productivity, whereas delaying it could dampen the morale and productivity of would-be retirees. However, these negative effects appear to be small, so on the whole retiring later would increase GDP in the longer term. Working people certainly pay more income taxes and social security contributions than retired people, so a later effective retirement age would generate more funds to pay for pensions. Likewise, there would be less pressure on those funds as delayed retirement means people start drawing their pensions later. Working longer also helps people to stay out of poverty, which is particularly important where pensions risk falling to low levels.