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Rethinking Retirement – Credit Suisse Research Institute (CSRI) – January 2020

7 February, 2020

In this study, the Credit Suisse Research Institute (CSRI) calls for an urgent rethinking of the pension systems due to population aging. What has so far been primarily a problem in developed countries, is also becoming a concern for the developing world. Governments worldwide will have to address issues related to this trend: how to ensure the financial security of an increasing number of retirees and how to establish a sustainable pension system for future generations. Here are some of the issues that the CSRI considers most pertinent:

  1. Aging societies and the wave of retirement

As a result of declining fertility rates and increased life expectancy, the proportion of retirees in the population has increased in the developed world from 7.7% in 1950 to more than 19% today, and is expected to reach approximately 27% by 2050. By contrast, the proportion in developing regions was 3.8% in 1950, and is projected to increase to 7.4% by 2020. Although developed countries will experience the impact first, developing countries will experience the process much more rapidly.

One of the main victims of this demographic trend is the pension system, since the increase in the number of pensioners contrasts with the ongoing decline in the number of taxpayers. Benefits will also have to be paid for a longer period of time, without any growth in productivity. This evolution will also have a negative impact on economic growth. Moreover, according to the report, the longer the debate is delayed, the more difficult it will be to find a solution.

  1. The long road to sustainable retirement

Many countries have already reacted by reforming their pension systems, and among the most popular general reform trends is the transition from defined-benefit systems to defined-contribution systems.

In general, the following four options summarized in this study can make pension systems more sustainable. First, people could be encouraged or obligated to save more for retirement during their working lives. Second, additional funds could be acquired by raising taxes. However, since taxes are already high in many OECD countries, this approach is unlikely to offer a solution. Third, raising the retirement age would be an obvious approach to narrowing funding gaps, and could be supplemented by incentives to encourage people to work longer. Fourth, people could accept lower pensions in the future to ensure the long-term sustainability of the system. However, a combination of measures will usually be required to ensure that future pensioners continue to enjoy the standard of living they are accustomed to.

  1. Age is not what it used to be

Chronological age (determined by the calendar date a person was born and measured in days, months, and years) fails to transmit information regarding an individual’s well-being. Thus, basing the normal retirement age on a universal, rigid threshold, does not reflect its multidimensional nature. In other words, the biological age no longer corresponds to the chronological age, and, for example, a 65-year-old Swiss citizen today is equivalent to a 51-year-old citizen in 1950.

When policymakers fail to address this reality, their policies can lead to inequality, creating winners and losers: while healthy people (at a biological age less than their chronological age) will enjoy the benefits of a longer working life, less healthy people (at a biological age above their chronological age) may be seriously affected by the extra years in the workforce, and the fact that they are not working leads to a reduction in old-age income.

  1. Attitudes toward retirement

According to the report, people in developed countries seem to be more concerned about the sustainability of their pension systems. They are aware of the need for painful reforms and have already seen some measures implemented in their own countries. Thus, their expectations for future retirement benefits are somewhat lower. By contrast, in several developing countries, retirement systems are still maturing and younger generations hope to achieve better coverage.

  1. The changing face of retirement

For much of human history, life has consisted of at most two stages: education and work. Only over the past century has retirement completed the three-stage life cycle in many countries worldwide. But with increased life expectancy, the traditional three-stage path may not adapt to the new reality.

Enabling new life trajectories in a multi-stage approach is an option that could make a long working life much more attractive and therefore help ease the tension in pension systems. This also brings new challenges with it: people must regularly invest in their skills and health to remain fit for work.

In conclusion, non-standard forms of work offer possibilities for prolonging careers, while posing a risk if workers rely too much on them in a multi-stage life cycle, or are not sufficiently covered by pension plans. The difficulty here is to design pension systems to suit the needs of an increasingly heterogeneous group of workers.

To download this study, please click on this link.

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