In the 18th century, the Church of Scotland had a problem – widows. Whenever a married minister died, his salary was transferred to his successor. If the dead man was married, his widow and children could find themselves without either income or home. The only option for some was the poorhouse – an unedifying spectacle for a church.
Two churchmen, Dr. Robert Wallace and Alexander Webster, decided something needed to be done. They wanted to create a fund that would provide ministers’ widows with a pension. But how to design it? Rather than turning to prayer, the two sought a solution in another of their great passions – mathematics.
As Yuval Noah Harari explains in his excellent Sapiens, the two churchmen exploited the emerging field of probability and, in particular, the Law of Big Numbers. This stated, in effect, that while “it might be difficult to predict with certainty a single event … it was possible to predict with great accuracy the average outcome of many similar events”. So, while it was impossible to say how many years an individual 60-year-old minister might live, one could say how much longer the average 60-year-old man would live. All that was needed was good data.
Here the two ministers were in luck. At the end of the 17th century, the great astronomer Sir Edmund Halley – better known today as a comet spotter – had studied records for births and deaths in the German city of Breslau. From these, he produced some of the world’s first life tables, which gave precise odds for the probability that a person of a certain age would die in a certain year.
The two preachers used this data to design their fund. As Dr. Harari explains, the fund proposed a range of pension plans: For example, any minister who paid in £2.12s.2d (or about £2.61) a year would guarantee an annual pension for his widow of £10 – more than enough to keep her out of the poorhouse.
The fund was an enormous success, not just because of the peace of mind it brought to ministers’ families but also because its careful design meant it was financially sound. Wallace and Webster had predicted that 20 years after its establishment, the fund would be worth £58,348. They were wrong: In fact it was worth, £58,347 – just £1 short of their forecast.
If only things were as straightforward today. The church fund existed at a time when – outside periods of disease and war – life expectancies changed little. That’s not the case now. In a typical wealthy country today, the life expectancy of a 65-year-old is rising by nearly two months every year.
Rising life expectancies are, of course, a good thing, but they do create problems for pension funds, most notably “longevity risk” – in other words, pension funds aren’t always taking sufficient account of just how much longer people are living. That’s due in part to the fact that they may be relying on outdated data that doesn’t improvements in life expectancy. According to a new OECD report, getting these estimates wrong can be costly: “Each additional year of life expectancy not provisioned for can be expected to add around 3-5% to current liabilities.”
Rising longevity is posing other problems for pensions, according to the OECD Pensions Outlook 2014, released today. In many countries, the rising share of retirees in the population will leave more people dependent on a shrinking share of workers. This imbalance will become much more evident as growing numbers of post-war baby-boomers reach retirement age.
There are other uncertainties, too, notably what Larry Summers (pdf) calls “secular stagnation” – a drawn-out period of economic sluggishness “characterized by low returns, low interest rates, and low growth”, says the Outlook. Meeting pension commitments against that backdrop could become quite a challenge.
How are governments responding? The Outlook reports that the pace of reforms has speeded up. Priorities have included raising the retirement age and linking benefits to expected rises in longevity as well as steps to strengthen the funding of private pensions. And to respond to rising public concern over private pension providers, there’s a growing focus on how the sector is regulated. Still, there’s no doubt that much more will need to be done if today’s future pensioners are to enjoy the peace of mind of those 18th century Scottish widows.
OECD Pensions Outlook 2014 (OECD, 2014)
Mortality Assumptions and Longevity Risk (OECD, 2014)
OECD work on insurance and pensions
Imagine the scene reported in Der Spiegel in February 2010. A ruthless gang of kidnappers have forced their helpless victim to fax his bank and withdraw millions for them. But the victim is not as helpless as he seems. Unknown to the gang, he slips a secret message into the fax, and his banker tips off the police. A crack antiterrorist unit springs into action, surrounding a cosy villa in a sleepy holiday town. The highly-trained commandos manage to overpower the criminals, including the 74 year-old ringleader and his 80 year-old wife, along with three other pensioners. At their trial, the judge refused to believe that they’d simply invited their victim for a stay in the mountains to help him think better. Probably because they’d broken his ribs and bound and gagged him during the journey.
Why did people you’d expect to write to the paper complaining about the youth of today end up with convictions for kidnapping, torture and other serious crimes? The victim was their financial adviser and his kidnappers lost 2.5 million euros (about $3.4 million) when the subprime market collapsed, taking a substantial part of their retirement funds with it.
Despite the seriousness of their crimes, the gang did get some support, especially among people their own age, usually stout defenders of law and order. In the UK for instance, the following are typical of comments in the Daily Mail, 36% of whose readers are over 65, and 56% over 55: “OK, they shouldn’t have done it, but I can understand their frustration.” Or, “I admire these old people. They worked all their lives in order to have a comfortable retirement. To watch it all go up in smoke because of a con-man and shyster is unforgivable.”
These reactions are one expression of widespread anger against financial institutions, aggravated by the millions in bonuses their members award each other, but the financiers don’t get all the blame. Governments across the OECD urged citizens to “take responsibility” for their retirement by investing in private pensions. The financial crisis and the collapse in share prices left many people feeling they were given poor advice. They get the impression that in spite of doing all the right things, they face a bleak future.
In many cases, they’re right, especially if they’re poor or have had periods out of the workforce due to unemployment or to raise children. OECD Pensions at a Glance 2013, published today, says that the social sustainability of pension systems and the adequacy of retirement incomes may become a major challenge. “Future entitlements will generally be lower and not all countries have built in special protection for low earners. People who do not have full contribution careers will struggle to achieve adequate retirement incomes in public schemes, and even more so in private pension schemes which commonly do not redistribute income to poorer retirees.”
The OECD argues that people should work longer and save more for their retirement to ensure that benefits are adequate to maintain standards of living into old-age. Most OECD countries will have a retirement age for both men and women of at least 67 years by 2050, an increase from current levels of about 3.5 years on average for men and 4.5 years for women. Recent reforms will mean that most workers entering the labour market today will get lower pensions than previous generations and will need to save more for their retirement. Working longer may compensate for some of these reductions, but overall each year of contribution will pay out less than today.
Looking just at the figures, you could get the impression that this is a golden age for old age. Pensioner poverty shrank to 12.8% in 2010 from 15.1% in 2007, with falls in 20 countries and rises in only Canada, Poland and Turkey. Children and young people now face higher poverty rates, at 13.4% and 13.8% respectively. But old-age poverty is likely to be higher in reality. Not all pensioners who need last-resort benefits to supplement their income actually claim them, due to stigma or lack of information on entitlements. Further cuts to public services like healthcare could hurt pensioners in particular.
This grim picture of what’s in store for old people comes just after A Good Life in Old Age? another OECD warning about what to expect when you grow old if nothing is done now to change policies and practices. A coordinated barrage of depressing reports on everything that matters to “seniors” probably isn’t what the authors of Pensions at a Glance have in mind when they argue that a “holistic approach to ageing is needed”. The Pensions at a Glance editorial argues that since retirement incomes reflect employment and social conditions over the whole career of an individual, pension systems alone can’t correct inequalities and compensate for breaks during working lives.
Ageing societies will therefore need much more policy action than just pension reform. They will need much more strategic thinking around a series of questions the editorialists don’t claim to have all the answers to. What should our societies of the future look like? How will we deal with the old-age care challenge? What will be the fiscal impact of ageing and what will this mean for social protection systems and the sharing of responsibilities between the individual and the state, between public and private service providers? And how can we maintain solidarity in a context of rising inequalities between and within generations?
You can read the full report below:
Today, the OECD publishes Help Wanted? Providing and Paying for Long-Term Care. In this post, Maxime Ladaique, Manager of statistical resources in the OECD Directorate of Employment, Labour and Social Affairs looks at the question of intergenerational solidarity. Promoting Solidarity is the theme of a panel discussion on 24 May at the OECD Forum session on “Life After the Babyboomers”.
It’s an issue most of us will have to deal with sooner or later, if we’re not doing so already – as parents, grandparents or children of ageing parents.
First, I’d like to define what we mean by “intergenerational solidarity”, before looking at the actual extent our populations are ageing, and what the consequences might be regarding the demographic and social challenges looming ahead of us in the coming decades, and of the solutions for policy makers, so that all generations live together, as united as possible.
Intergenerational solidarity can refer to help across generations, either via cash transfers within a family – between parents and children for example, or via time spent to care for children, grandchildren, or for parents.
But intergenerational solidarity can also mean that generations have a positive view of one another, or that there is consensus across generations on the way forward.
Measuring such a broadly-defined concept isn’t easy. Nevertheless, relations between generations today appear to be positive, according to attitudinal surveys. For example, the Eurobarometer conducted in 2009, asked the provocative question “Are older people a burden on society?”. In 21 European countries that are members of the OECD, 62% of people strongly disagree that older people are a burden, with a further 23% somewhat disagreeing. Only 14% agree with the statement to either degree.
The problem is that this exchange across generations works well in times of demographic balance, but less so in the current context of population ageing.
You can see one change due to ageing in the fact that nowadays, families are often made up of four generations: children, parents, grandparents and great grandparents. This is thanks to what is first and foremost good news: we live longer. In 1961 when the OECD was created, citizens of OECD countries lived until 69 years of age on average. Today, that has risen to 79.
A second reason for population ageing is what many regard as not so good news: fewer children are being born. Fifty years ago, women had on average just over 3 children in OECD countries. Today, they have on average just under 2.
Some people fear that this demographic imbalance has set a social time bomb ticking.
First, because of pensions. Did you know that in 1961 there were 7 persons of working age per person of retirement age on average across OECD countries? This ratio is currently 4, and it drop to 2 in 2050.
Without reforms, spending on public pensions will double in the next 40 years. Governments will not be able to cope. We know the solutions, but they are not easy to put in place. Governments could postpone retirement age, so we’d have to work longer. Or give financial incentives to employers to keep older employees at work so that they contribute longer. Or introduce greater diversification of sources of retirement income, giving a greater role to private arrangements.
Caring could also pose problems. The share of those aged 80 and over will more than double in the next 40 years, from 4% to 10% of the population. And today, most care for older people is informal. Typically, between 70% and 90% of people providing care for older people are family members. But as populations get older and more and more people need care, families are not going to be able to cope any longer. Governments need to help them by providing either financial subsidies to help them to get some professional care at home, or by investing in the creation of retirement homes, which are already desperately needed in many countries.
I’m sure we all agree that there is an urgent need for governments to react to population ageing in order to keep our generations united, but whether you’re from my generation or not (I’m 41), I’d be interested to hear your ideas.
“Don’t Stop Working!” Not our advice, but the headline on a Slate article about one of the world’s longest-running sociological studies. Back in the 1920s, the American psychologist Lewis Terman gathered together 1500 exceptionally bright boys and girls and began a study of their lives that would continue for eight decades. Today, only a few of Terman’s “Termites” are still alive, and final conclusions from the study are being published.
One aim of the research was to find out what makes some people live longer than others. The findings are interesting: For instance, the death of a parent in childhood had relatively little impact on longevity, but parental divorce did. Adults who were gloomy and neurotic as children also tended to die relatively young. But so did those who had been extra cheerful, perhaps because of a devil-may-care attitude towards smoking and drinking in later life. The real winners in the longevity stakes were the conscientious kids, those who as adults maintained “a fairly high level of physical activity, a habit of giving back to the community, a thriving and long-running career, and a healthy marriage and family life”, as The Wall Street Journal puts it. Hence Slate’s advice to keep on working.
That may also be music to the ears of governments, which increasingly want to see people working later in life. As the latest edition of OECD Pensions at a Glance reports, around half of OECD countries have already started, or are planning to start, raising “pensionable ages” – the age at which people qualify for a full pension. By 2050, the average in OECD countries will reach just under 65 for both sexes – that’s nearly 2½ years above the current age for men and 4 years for women.
A key reason for this move lies in the fact that we’re living longer. As a result, most of us will be living off pensions for much longer than our grandparents did. In 1958, a man who reached pensionable age could look forward to living for around another 13 years; by 2050, that number is forecast to rise to just over 20 years. The figures for women are perhaps even more striking: 17 years in 1958, but 24½ years – almost a quarter of a century – in 2050.
Paying for all this risks being a major strain on the taxpayers of the future, especially as there will be relatively fewer of them than today: In most OECD countries, declining birth rates mean that non-working over-65s will account for an ever larger slice of the population. In 2000, about a third (33%) of people in OECD countries were aged over 65; by 2050, that number is forecast to exceed 41%.
So, in all probability we’ll all have to go on working a bit longer. Not everyone’s happy with that: In France, unions argue the burden will fall unfairly on blue-collar workers. But it’s interesting to note that the higher retirement ages of the future will in some ways take us back to where we were: Over the second half of the 20th century, the average pensionable age in OECD countries fell by two years, before beginning to rise again in the 1990s. If the forecasts are accurate, by the time we reach 2050 it will be only about 3 months above what it was in 1948, or 64.6 years.
8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide. In this post, Flore-Anne Messy of the OECD’s Directorate for Financial and Enterprise Affairs discusses women and financial education.
Elderly women in OECD countries are 30% more likely than men to be poor. Women receive $75,000 dollars less pension on average over their lifetime than men, despite living 5.6 years longer. But whatever their age, poverty rates for women in OECD countries are higher than for men.
It’s not just that women generally earn less than men. Where money is concerned, there are also big gender differences in knowledge and skills. Research in the US and other countries shows that women are less likely than men to give the correct answer to financial knowledge questions. They are also more likely to lack confidence in their own skills, be cautious investors, and to have insufficient funds for retirement. This cautious approach does have advantages but can severely impact on retirement funds. Studies in the US suggest that women’s retirement pots are, on average, a third smaller than men’s. (more…)
Fiona Stewart seems to suggest that any reform (i.e. the French government pension reform) is a good one and that anyone who opposes such reform (i.e. the French labour movement) is opposed to any reform whatsoever. The French unions are not opposed to reform as such. They are perfectly aware of “the scale of the challenge of paying for our pensions”. They just happen not to agree with the direction taken by the government.
In fact most of the French unions would be ready to support the current reform process if only there had been some room for negotiation. But negotiation with unions never really happened; instead the French government simply rushed through the parliamentary process.
Based on the two criteria that really count when discussing pension reforms – financial sustainability and fair risk sharing – the French reform isn’t a good one. The goal of the reform is to reach financial balance in the system in 2018. Not only will this deadline be missed, but as a result of the reform, the much valued French pension reserve fund – the Fonds de réserve des retraites (FRR) which was set up in the late 1990s to prepare for the demographic change after 2020 – will be spent completely by then. What will happen after 2018, nobody really knows.
This reform will not make the French PAYG more robust financially in the long run. It is a reform that was prepared in haste to appease the sovereign bond markets and the credit rating agencies in the short term.
It is also an unfair reform. It puts all the burden on the lower income households and on blue collar workers, because it is based almost exclusively on raising the retirement age on full pension from 65 to 67(and not from 60 to 62 as widely reported), which is only one among many pension parameters. At the same time, the reform does little to increase the rate of participation of people aged 55 to 65 in the workforce, which is fundamental to any PAYG scheme’s sustainability. France has one of the lowest participation rates for this age group in the EU, not to speak of the OECD. And yet and the reform does little to “arm twist” the French employers to act decisively in that respect.
In effect, this reform will transfer the financial burden of the inactivity of people aged 55-65 from the pension system to other government welfare programmes, be it unemployment schemes or targeted social safety nets.
After the crisis: towards a sustainable growth model from the European Trade Union Institute
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.