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The Creeping Public-Pension Debacle

LONDON – If developed countries acted rationally, and in the interest of electorates that understood how their tax money is spent, they would set their public-pension retirement age at or above 70. But most developed countries have retirement ages below this mark, and, despite some progress, it will be decades before they catch up. In the meantime, Western welfare states will remain financially unviable, economically sickly, and politically strained.

Demographic aging is the social and economic equivalent of climate change: it is a problem that we all know must be addressed, but which we would rather leave for future generations to solve. The impulse to put things off for a later day is understandable, given current economic and political troubles; but when it comes to public pensions, procrastination comes at a high cost – even more so than in the case of global warming.

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In 1970, the average effective retirement age for French male workers was 67, which was roughly the same as male life expectancy at that time. Now, the effective retirement age in France is just below 60 (the official retirement age is 65, but in practice public pensions can be drawn much sooner), even though male life expectancy is nearly 83.

It is no wonder that France spends the equivalent of nearly 14% of its GDP annually on public pensions. Early retirement is even costlier for Italy, which tops OECD rankings of public-pension spending, with an annual outlay equivalent to nearly 16% of its GDP.

In all, 13 OECD countries – including Japan, Germany, Poland, and Greece – devote the equivalent of 10% or more of their GDP to public pensions every year. These and other countries are taking money mainly from working taxpayers and giving it to retirees.

When German Chancellor Otto von Bismarck invented the world’s first statutory pension scheme in 1889, he set the eligibility age at 70; few people were expected to live long enough to collect benefits, and certainly not for many years. Now, Italians who retire on average at 61-62 can expect to receive their pensions for several decades, and in some cases, for almost as many years as they worked.

With around one-fifth of advanced economies’ populations over 65 (a proportion that is expected eventually to rise to one-third), public-pension expenditures will increasingly crowd out other public spending. Moreover, reducing public-debt levels will become more difficult unless there is a miraculous revival in economic growth, which current pension policies makes less likely every year.

This is not just a question of how we treat older people. Tax revenues transferred to pensioners could have been invested in infrastructure, education, scientific research, defense, and all the other urgent causes that politicians claim to support. Pensioners do spend the money they receive, so this revenue isn’t wasted; but it could be better spent to propel stronger economic growth.

Developed countries have been raising their retirement ages gradually, but trade unions and pensioner groups lobby hard against any increase. In fact, in 2014 Germany’s governing coalition yielded to union pressure and actually reduced the retirement age for some manual workers, despite frequently lecturing other eurozone countries to do the opposite.

Beyond lobbying, the current system is upheld by mythology: the belief that keeping older people in the workforce worsens unemployment. It does not, and this is what economists call the “lump of labor fallacy” – the idea that handing out pensions frees up employment for younger people, as if there were a fixed number of jobs to go around. In reality, more people earning, consuming, and paying taxes leads to more economic growth. Delaying retirement does not steal jobs; it creates them.

On August 29-31, I moderated the World Demographic & Aging Forum in St. Gallen, Switzerland, where attendees arrived at a clear conclusion: although we have increasingly rich data and sophisticated knowledge about future population trends, our concerted action to address those trends falls woefully short.

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Public policy is one part of the problem, but corporate behavior has been an even bigger obstacle to commonsense pension reforms. For starters, corporate pay and promotion structures are biased toward early retirement, because companies tend to push out older workers first when they need to cut costs. Even companies catering to the “silver market” (elderly consumers) have barely begun to develop more age-friendly employment practices.

The slow recovery following the 2008 financial crisis has obscured the long-term reality that developed countries now face. Any country required by its public-pension policy to transfer billions of dollars to citizens for decades-long retirement periods risks bankruptcy or, at best, stagnation. One of the most urgent tasks for governments, companies, and individuals today is to rethink the length and pattern of our working lives.