Update No. 64 – 15/06/12

Last week I discussed my view that an open immigration policy would substantially ease the issues facing the Euro zone.  This week I’ll expand on the other great policy change that in my view, all nations must consider, given the continued growth in life expectancy – the retirement age.

It must be first acknowledged that retirement age is (and always will be) whenever you would like to retire if you are able to support yourself, the retirement age I refer to is the legal age at which you can draw a state funded pension.  From the ABS:

“Life expectancy in Australia increased substantially during the 20th century. In the period 1901-1910, the average life expectancy of a new-born boy was 55 years and that of a new-born girl, 59 years.2 By the end of the 20th century a new-born boy could expect to live 76 years and a new-born girl nearly 82 years”

The ‘pension’ was introduced in Australia in 1909; the average life expectancy was about 57 at that time.  By extrapolation, I can say, the government when introducing the pension in 1909 had it in mind you’d statistically have been dead 8 years earlier when you drew your first pension cheque, a pretty safe bet…  Given the Australian life expectancy was about 81.5 years in 2009, a similar rule would put retirement age at about 89.5 years.  Obviously I’m not proposing anything like that, but the Australian government recently made ‘controversial’ changes to the retirement age, legislating to extend it to 67.  So in the space of about 100 years, there has been introduced (through improved life expectancy & retirement rules scarcely changing) a 22.5 year increase in the average period the government is likely to need to support a pensioner.  Call me hard-line if you will, but this doesn’t seem sensible.  It seems intuitive to me that the simplest way to deal with this is a pension age that is calculated as (life expectancy – X years), now the ‘X-years’ would need to be negotiated/considered, but it seems to me that about 12 years would be fair.  That would mean the retirement age in 2012 in Australia would be about 70 years.  This 3 year boost to the recent proposal of 67 seems politically achievable, but it is not the immediate benefits that are important.  The future benefits are the real ‘prize’ of this policy, that is to say if the life expectancy in Australia in 2030 is say 85 years (this is not unrealistic based on recent history of life expectancy growth), then retirement age in 2030 would be 73 years.

This approach creates two further virtues in that those people who would really like to retire ‘younger’ are more likely to focus on their retirement saving efforts to be self-funded at a younger age.  In addition to this (in Australia at least), the extra years will give the average worker a couple of extra years for their superannuation/retirement savings to compound making it yet less likely they will ever require state-funding, and as demonstrated, the government will always be assured that the average duration of a pension will be 12 years as it is intrinsically linked to the life expectancy figure.

Particularly in countries with low or negative population growth, demographic issues should be mitigated by sensible policy, because your grandparents retired at 65 does not mean it makes sense for you to do so, particularly if they were expected to live 10 or 15 less years than you are.  Policy must move with demographic reality, and especially given the increasingly less physically demanding work most people are doing, extending your working life does not seem unreasonable – Tony Hansen 15/06/12.



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