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The debt crisis left in the wake of the 2008-09 global recession, joined to the growing demographic predicament of falling birth rates and aging populations in the U.S. and the European Union, has led to vigorous debate and governmental action around raising the retirement age for workers.
Michael Huether, chief economist with the
Cologne Institute for Economic Research, a German conservative economic think tank, recently sparked anew the debate in Germany when he said that low birth rates and growing life expectancy would lead to requiring citizens to work until they are 70 before they can qualify for pensions. Germans currently may retire at age 65.
“If we look at the higher life expectancy and the shrinking birth rate in Germany, a retirement age of 70 will have to be introduced over time,” Huether told the daily Rheinische Post.
The proposal echoes a similar assessment by the European Commission (EC), which stated in July 2010 that the 27 member states need to hike their retirement ages to 70 by 2060. The topic is on the agenda across Europe, but no country is planning to go beyond 68 at this point.
“There is dire necessity to act,” Thomas Belker, SPHR, GPHR, managing director of human resources for
OBI Group Holding in Cologne, Germany, told SHRM Online.
As with many pension plans, the German pension system is based on the concept of an “intergenerational contract,” Belker explained, referring to the “consensus” that members of working generations provide pensions for members of retired generations through payroll deductions, though “the use of the word ‘contract’ is not accurate as the next generation implicitly enters the agreement without consent,” he said.
“This construct has been in imbalance for decades,” Belker continued. “A decreasing number of employees have to pay higher contributions for more and more retired people.”
In the United States, the recession has had a damaging impact on Social Security, reducing payroll taxes and resulting in Social Security’s first projected annual deficit since 1983. This, added to the expected wave of Baby Boomer retirees, will take a toll on the long-term viability of the insurance program.
Congressional leaders recently stressed that with people living longer and enjoying better health in their senior years, the nation simply can’t afford to pay benefits for as long as 30 years after retirement.
“We need to look at the American people and explain to them that we’re broke,” said Rep. John Boehner, R-Ohio, who is advocating raising the retirement age for full Social Security benefits to 70 for people now 50 or younger, curbing benefit growth by tying cost-of-living increases to the consumer price index rather than growth in wages, and providing benefits only to those who need them. “If you have substantial non-Social Security income while you’re retired, why are we paying you at a time when we’re broke?” he said in an interview with the Pittsburgh Tribune-Review.
“We could and should consider a higher retirement age, or one pegged to life span,” echoed House Majority Leader Steny Hoyer, D-Md. He pointed out that the size of deficits and public debt will require cuts and reforms in all major programs, including Social Security.
All of Europe is facing the trend of aging populations. While there are currently four people working for each retiree, projections indicate that by 2060 on average there will be only two, stressing the affordability of a generous pensions system, according to the EC.
“Unless people, as they live longer, also stay longer in employment, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure may occur,” the EC reported. “The situation is untenable,” the commission warned.
The need for a restructured pan-European pensions settlement was underscored during the recent Greek financial crisis, when critics of a bailout for the country asked why Germans who worked well into their 60s should be paying for Greeks to retire in their 50s.
Responses to the political hot potato have been diverse across the 27-member bloc, and retirement ages vary from country to country:
Britain plans on scrapping a rule under which people can be forced to retire at the age of 65, the new Conservative-Liberal Democrat government announced July 29, 2010. While employers in a few sectors will still be able to enforce a compulsory retirement age, the move, which goes into effect in October 2011, is expected to allow more people to work longer, boosting Britain’s strained public finances by paying more in taxes and delaying claiming the state pension.
“Many older people want to work after age 65 and have a wealth of skills and experience that are not being used,” Pensions Minister Steve Webb said at the announcement.
The retirement age to collect full benefits for men, currently 65, will increase to 66 in 2016 and may rise to 68 by 2046. The average British man retires at the age of 64.6 years and the average woman at 61.9 years, according to official statistics from 2008. Men in Britain can currently claim the state pension from the age of 65 and women from the age of 60.
France’s President Nicolas Sarkozy has pledged to lift France’s minimum retirement age to 62 from 60 and the age at which full benefits kick in to 67 from 65. The retirement age will rise gradually for people born after 1950 by four months a year to 62 in 2018. The measure will begin in July 2011.
Italy’s Prime Minister Silvio Berlusconi announced in July 2010 his government’s plan to increase the retirement age by three years, effective from 2015. The Italian pension system will have two retirement options. In the first case, civil servants can retire at the age of 65; secondly, men in the private sector can retire at the age of 65, while women in the private sector can retire at 60.
Germany’s upper house of parliament in 2007 gave final approval to a measure for a gradually phased increase in the retirement age to 67 from 65. Under the reform, the increase is to take effect in steps between 2015 and 2029.
Spain’s Prime Minister Jose Luis Rodriguez Zapatero tested the waters on pension reform in February when he announced plans to raise the retirement age to 67 from 65, causing widespread outrage among Spaniards.
Ireland’s government in 2009 announced an increase in the minimum public service pension age to 66 from 65, with a maximum retirement age of 70, effective from 2010.
The Netherlands has debated increasing its retirement age from 65 to 67, whereas Portugal and Denmark want to stick with 65 for the time being.
Sweden has a flexible retirement age that allows people to retire as early as 61, and as late as 67.
Greece’s government intends to increase the national pension age and ban early retirement as it tries to tackle its catastrophic budget deficit. The socialist government said it wanted to increase the average retirement age from 61 to 63 by 2015 as part of a series of austerity measures aimed at curbing the country’s deficit and national debt.
All Together Now
Although several European countries have announced moves toward pension reform and raising the retirement age, the European Commission wishes to make such moves programmatic.
Under the EC’s proposal, all governments would impose automatic changes to ensure that the longer people live, the later they retire, allowing each country to still have different retirement ages, but ensuring that all progressively increase.
“The basic idea is to transfer decision-making from the political arena to the realm of the law,” the commission said. It noted that some governments have already introduced automatic mechanisms. Retirement ages are linked to economic growth in some states and to labor-market indicators and the financial health of pension funds in others, according to the EC.
“Introducing an automatic adjustment that increases the pensionable age in line with future gains in life expectancy ... represents a promising policy option,” the commission said.
The commission suggested that the European Union could construct a system of surveillance and “peer review,” with member states checking up on each other to make sure their pension systems are sustainable.
Organisation for Economic Co-operation and Development (OECD), an economic information-sharing organization of 32 highly developed countries, determined that the average legal age of retirement is just over 64 in OECD countries, but dips to as low as 58 in Turkey and Greece, taking into account that ages can vary between the sexes, with women often entitled to earlier retirement.
But that’s only part of the story: The labor force exit age—the actual average age when a person stops working—is often higher or lower than the official retirement age. In Korea, a man typically works past age 71—more than 11 years beyond retirement age; by contrast, his counterpart in Austria retires from the daily grind at about 59, or six years ahead of the official retirement age. In France, most people stop working before they are 60.
How long do people spend in retirement? On average in OECD countries, it’s just over 22.5 years for women and about 17.5 for men, who tend to work longer and die younger. For women and men, the longest retirements are in France, where retirement stretches on for about 27.5 years for women and 24 years for men, compared with just over nine in Mexico.
When workers retire, the pension benefits they will receive compared to when they were working will vary widely, according to OECD estimates. Low earners on average will get around 70 percent of their earnings. In Germany and Japan, they will get less than half of their previous earnings. Average earners will get around 60 percent of their previous salaries in most OECD countries; however, in the U.K. they will get only 30 percent. In most OECD countries, public pensions make up around 60 percent of people’s retirement income. The cost of public pension systems keeps rising. In 2007, public spending on pensions accounted for 10 percent of gross domestic product in the European Union. By 2060, that figure will rise to 12.5 percent, according to the OECD.
Retirement Ages of the OECD Countries 2010
Elevating the U.S. Retirement Age
Worries about retirement security are not confined to Europe. Soaring budget deficits, longer life expectancy and the high cost of living in the U.S. have prompted lawmakers to publicly consider the politically unpopular notion of increasing the retirement age.
A deficit commission appointed by President Barack Obama was due to present its findings on how to ensure the solvency of Social Security in November 2010, and it is expected to endorse such measures as raising the retirement age, according to reports.
“Longer employment will be the reality soon,” said OBI Group Holding’s Belker. “HR will have to actively support the transition to longer working lives, the consideration of how to integrate older workers and their different needs, and to manage more generations working side by side,” he said.
Roy Maurer is a staff writer for SHRM.
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