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22 October 2010
by Guest author

This post comes to us from Fiona Stewart of the Financial Markets, Insurance and Pensions Division of the OECD’s Directorate for Financial and Enterprise Affairs.

Those of us struggling with our commutes to work in France don’t need to be reminded that pensions are on the top of the agenda again in many OECD countries.  Workers are understandably perturbed when they feel as if their hard earned right to a well deserved retirement is under threat.

Yet, given the ageing of the population across the OECD region, the scale of the challenge of paying for our pensions is rarely understood. Without reforms, spending on pensions will require an extra 5% of GDP by 2050 – posing a much greater challenge to our economies on a long-term basis than the financial and economic crisis of recent years.

We are all living longer – which is a good thing – and we are increasingly healthy at older ages. When pension systems were first introduced, the retirement age was 65 and life expectancy was 65. Now we might work for 30 years and be retired for 30 years.  Lord Turner, who conducted a major review of the pension system in the UK a few years, ago spelt out the choices we have starkly – we can save more, live on less in retirement or work longer.

Some say that corporations making big profits should be taxed more (the banks which were so involved in the financial crisis being singled out) or that governments should cover the rising cost of our pensions rather than individual workers. But this does not solve the problem that the costs of our pensions are ever rising and there are fewer and fewer young workers to pay for them.

One particularly striking (being the operative word) fact in France is that young students are demonstrating against the rise in the retirement age.  No one seems to be trying to explain to them that if these reforms do not happen they are the ones who will be hit hardest and have to pay in the long run – as they will have to pay for the decades of retirement their parents are likely to enjoy, whilst, when it comes to their turn to retire, there may not be enough money to pay for their pensions.  To the great French cry of ‘Liberty, egality, fraternity’ should be added ‘intergenerational solidarity’!

The complexity of the pension debate again means that the students are mixing the issue with other matters – notably arguing that if the older generation work 2 years longer, they will have to wait 2 years more until these jobs are ‘freed up’ and they can start work.  Yet the experiment of the 1980s and 1990s recessions, when early retirement was used as a policy tool to try to fix unemployment, showed that these policies did not free up jobs, but in fact had the opposite effect, as the number of jobs within an economy is not a fixed pie to be shared out.

Fortunately OECD governments have learnt this lesson and are indeed pushing ahead with raising the retirement age – as we saw in the UK this week. Some have also linked the retirement age to longevity increases, making the rise gradual and automatic which should avoid damaging political battles such as these in future.

Sure our pension systems aren’t perfect – and neither are the French reforms. For example, there are still unanswered issues such as how to ensure women, who tend to have broken career paths for child rearing, receive more equal pensions, or how we should treat those in particularly strenuous or dangerous jobs, or the unfairness caused by differences in longevity across social classes. The 40 year contribution period to be introduced into France is fairly long by OECD standards, and arguably hits blue-collar workers more disproportionally  But these issues should not cloud the core fact that working a few extra years in retirement is an essential step to putting our pension systems on a sustainable path and securing them for future generations.

As France demonstrates, much still needs to be done by governments to communicate why pension reforms are needed and how we must not only share the costs of our rising longevity, but hopefully celebrate the fact as well.

Useful links

OECD work on pension systems

OECD work on private pensions

Article by the author on pensions as a policy response to the financial crisis

4 Responses leave one →
  1. Katie permalink
    October 22, 2010

    From one resident of France to another, bravo on an excellent article. You have hit the issues squarely on the head and explained them in such a way that all readers (regardless of generation!) can understand and relate to them. Now if only the media or government would share this knowledge to paint the full pension picture…
    Thanks again!

  2. November 16, 2010

    Dear Fiona,
    I fully agree with your well articulated mail. It is not only the French challenge – we face some others globally: for the coming 50 years we have to feed a further group of people: 3 billion that will live in addition to our for 2011 expected 7 billion. And “some” of the existing ones already have no access to enough water (drinking water quality) nor to food, energy or education.
    Our “problem” (=ageing, which should be seen positively and not as a threat!) has to be linked to the global challenge: bringing more knowledge to politicians or at least making them able to talk about facts regardless of their voting audience. Intergenerational solidarity will be needed as well as a intercultural communication in order to make it possible to survive in peace – (sustainable!) and not only for those that are born very rich and will remain even richer in well secured areas (new townships for the rich only)!
    Our societies in France as well as in the rest of Europe will look quite different in near future: not the old will take away the jobs of the young – the few young that enter the job market will need the help of the old to make their own work done efficiently – and the societies and employers will need to change the environments in order to make the old working happily! Together we will make it: intergenerational, interregional as well as intercultural!Shifting old paradigmas – a great job, not only for politicians!

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  1. French pension reform: Unfair and unsustainable « OECD Insights Blog
  2. When I’m 64.6 … « OECD Insights Blog

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