Raising the retirement age will exacerbate the recession, said Roger Nightingale, global economist, speaking today to leading UK reward professionals at the Employee Benefits Summit 2009 in Monte Carlo.
Increasing the retirement age will result in more people aged over 65 competing for jobs and an expanded workforce. This, he explained, will lead to downward pressure on pay, which may put employers in a good position. However, such changes could also lead to an increase in the supply of goods and services, but decreased demand as workers are unable to afford what is produced.
“[Increasing the retirement age] will exacerbate the recession, but it has to be done,” said Nightingale.
This is because three crucial elements need to be in balance to make pensions work; namely:
• the percentage of salary contributed to a pension
• the percentage of salary expected to be paid out as a pension
• the ratio of working life to retirement.
If these are not in balance, he said, employees will not have adequate pensions in retirement; and with increasing longevity it is the third element that needs adjustment.“It is impossible to now save the amount of money that needs to be saved,” Nightingale explained. “The politically correct thing to do is to raise the retirement age; it should have been done 15 years ago.”
He mooted that the retirement age should now be (to meet current employer promises): 75 years of age in the private sector and 85 years of age in the public sector. “Anyone who doesn’t prepare for this is shutting their eyes,” he warned.
He also pointed out that the public sector is facing a crucial, but controversial change. “In the next five, ten, fifteen years, it will get rid of defined benefit schemes.” He warned that there will be disputes over this, but ultimately the changes will be enforced. “The unions will lose, the taxpayers will win.”
Nightingale feels that the pensions reforms coming in to force in 2012 via the Pensions Act will not end the pensions crisis because it does not tackle the fundamental issues. “What the government is doing is fiddling around the edges. It is rearranging the deck chairs on the Titanic. It should have been looking out for the iceberg.”
Nightingale said that the difficult changes to pensions should have been implemented in good economic times. “I do tear my hair out when I look at what has been done with pensions in the past 10, 15, 20 years,” he said. “The capacity to now pay out what is promised is zero.”