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Wednesday, July 7, 2010

The price of living longer


The British coalition government has announced that it will set from 2016 the qualifying age for old-age pensions for men at 66 instead of 65. Women have hitherto received old-age pensions at 60, but the qualifying age will be brought into line with that for men through a speedier timetable than hitherto proposed.

Although the British population is still growing, partly because of net immigration, and although the British old-age state pension is one of the lowest in the developed world, the burden on the working population of providing for retirement at 60 for women and 65 for men is no longer considered sustainable. The government also is proposing to change the rules for compulsory retirement of employees when they reach 65 in the hope that this will encourage a more flexible retirement culture.

The government faces increasing costs in paying public-service pensions in Britain. The number of public-sector employees increased significantly under the last Labor government, and in some parts of the country such as the northeast of England the public sector employs more than half the working population. Public-sector pensions, which have hitherto been based on final salaries, have been, like old-age pensions, unfunded and have to be met out of receipts from taxes that are largely paid by the working population.

Public-sector pensions that are index-linked (subject to rises that are in line with inflation) are considered by some businessmen and politicians as over-generous compared with pensions in the private sector where a majority of final salary schemes have been closed to new employees and where many companies have serious deficits in their pension schemes.

An increasing number of pension schemes in the private sector are now based on defined annual contributions by employees and employers to pension funds in which the risk no longer rests with the employers but with the stock and bond markets. The burden of meeting the costs of public-sector salaries and pensions has led the government to impose a two-year freeze on salaries and to undertake a review of the public-sector pension scheme. This deems certain to be modified to the detriment of public-sector workers.

These changes, which have been forced on the government by the need to cut government expenditures, will inevitably arouse opposition and criticism. They are also the result of longer life expectancy resulting from advances in medical science. Last year, people in the United Kingdom had a life expectancy of 79.4 years. The median age of the British population was 39.7 years; 22.4 percent of the population were over 60 and 4.7 percent were over 80.*

The burden of paying pensions on the working population of many other developed countries is, however, greater than that of Britain. Japan in 2009 had the highest life expectancy in the world of 82.7 years and the highest median age of 44.4 years. It also had one of the lowest net reproduction rates of 1.27, the highest proportion of people over 60 (29.7 percent) and of people over 80 (6.1 percent).

Many European countries face similar problems. Germany and Italy have only slightly higher net reproduction rates than Japan and similarly aging populations. Retirement ages in France and some other European countries have been even lower than in Britain and the burden of public-sector pensions has been greater. Changes will have to be made in these countries as well, but they seem certain to lead to strikes in countries such as France and Italy, where striking has become a bad habit. These changes may also lead to some unrest, as they have already done in Greece.

The increasing number of older people as a result of improvements in medical treatment, a reduction of poverty and improvements in the environment are welcome developments, but they mean that systems put into place when life expectancy was lower are no longer sustainable. Most people in their 60s are capable of some form of work. They may no longer be able to undertake hard manual labor, but they should be able to perform other tasks, especially if they have acquired the skills and experience. This underscores the importance of education and training.

There is also a psychological problem. The idea of retirement at a fixed age is no longer viable. People have to get away from the belief that retirement means a life of leisure. Pension incomes are likely to decline in real terms both in the public and private sectors. This will force people to try to supplement their pensions by part-time work and should also persuade working people to save more for their old age.

Retirement should be a gradual process in which both physical and mental capacities are maintained. The old adage "if you don't use it, you lose it" is one that we all need to bear in mind as we get older. But while we want to avoid a dependency culture, it would be foolish to think that we can all be total masters of our own fate.

While we may live longer we are likely to face increasing physical and mental disabilities. Robots and mechanical appliances, such as stair-lifts, can be valuable aids to older people wanting to maintain an independent life, but we are likely to need more sheltered housing and more individual carers.

The provision of retirement homes calls for careful and imaginative planning and investment. Skilled carers need good training. For Japan the provision of adequate numbers of carers implies significant further liberalization of immigration from developing countries. This will involve a change in cultural attitudes that will be difficult to achieve.

The demand for further improvements in medical services will continue to increase as populations age. This will put a further burden on taxpayers and pressure on other public services. As developing countries such as India, where life expectancy has been comparatively low, become more prosperous there will be pressure on wages and on the prices charged for goods and services thus increasing the costs to developed countries.

We shall all have to go on working until we are older. In due course the average age of retirement may well have to go up to 70.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984. * The Economist's "Pocket World in Figures 2010"


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