OECD report: Increasing retirement ages and expanding private pension coverage is essential

Governments will need to increase retirement ages gradually to address increasing life expectancy in order to ensure that their national pension systems are both affordable and adequate, according to a report by the Organisation for Economic Co-operation and Development (OECD).

The Pensions outlook report 2012 said that over the next 50 years, life expectancy at birth is expected to increase by more than seven years in developed economies.

The long-term retirement age in half of OECD countries will be 65, and in 14 countries it will be between 67 and 69. Increases in retirement ages are underway or planned in 28 out of the 34 OECD countries.

These increases, however, are expected to keep pace with improved life expectancy in only six countries for men and in 10 countries for women. This means governments should consider formally linking retirement ages to life expectancy, as in Denmark and Italy, and make greater efforts to promote private pensions.

The report found that reforms over the past decade have cut future public pension payouts, typically by 20% to 25%.

In nearly all the 13 countries that have made private pensions mandatory, pensioners can expect benefits of around 60% of earnings. Conversely, in countries where public pensions are relatively low and private pensions voluntary, such as Germany, Ireland, Korea, Japan and the United States, large segments of the population can expect major falls in income upon retirement.

Angel Gurria, secretary general of the OECD, said: “Bold action is required. Breaking down the barriers that stop older people from working beyond traditional retirement ages will be a necessity to ensure that our children and grandchildren can enjoy an adequate pension at the end of their working life.

“Though these reforms can sometimes be unpopular and painful, at this time of tight public finances and limited scope for fiscal and monetary policy, these reforms can also serve to boost much-needed growth in ageing economies.”

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Malcolm McLean, consultant at Barnett Waddingham, added: “It confirms among other things the need for a strong political commitment to supporting pension provision going forward and express a concern that, because of the financial crisis, some countries have been dithering and by adopting a short-term response to the crisis they are putting at risk long-term sustainability and the long-term strength of private pensions.”

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