Retirement age should it be increased?

On February 1st an article appeared in McLean's Magazine, called The retirement age in Canada is too low—and that’s a growing problem, it was written by Peter Shawn Taylor and its lead is the following: The Liberals reversed a plan to push the eligibility age for retirement benefits to 67. It goes against global trends and economic reality.

What is the global reality today? Canada and the United States are two of the countries in the world where workers have to work longer before they retire. According to a study done byAperion Care, the average age of retirement in most countries hovers around the 62-65 age range, there are a handful of countries that plan for workers to leave the workforce even earlier. The United Arab Emirates (UAE) boasts the lowest official retirement age at 49 years old, though the age is 60 for expats (non-UAE nationals).

The African continent hosts several countries that have low retirement ages. Senegal, Mozambique, and Madagascar are the lowest at 57.5, while most hover around 58-60 years of age, such as Egypt, Tunisia, and Morocco. There isn’t much information about social services, government programs, or workforce stats but considering so much of workforce is involved in agriculture and labour, over time, a person’s ability to work is affected by the physical toll it takes on their body, and earlier retirement might be necessary.

Other countries, like Russia, Japan, and India, have retirement ages closer to 60, and with large populations of older or retired people. Family obligations, limited opportunity, and rampant poverty keep these large older populations from travelling away and keep them in the workforce longer to be able to make a living.

In Norway, 67 has been the official retirement age since the 1970s and there currently are no serious proposals to raise the retirement age. In 2011, Norway established “flexible retirement” for earnings-related pensions, meaning that Norwegians can draw pensions as early as age 62. Some social science data suggests that Norwegians preferred to retire at 61, then the age rose to 64 in 2013.

In the article, Mr. Taylor states that "According to the Organisation for Economic Cooperation and Development (OECD), Canada’s decision to revert to age 65 bucks a global trend. “Many countries are increasing their retirement age,” the OECD observes."

This argument is that contributing more and for longer, especially by postponing retirement as life expectancy increases, is the best approach to face the challenges faced by increasing longevity. The argument is that the best way to address the problems posed by improvements in life expectancy is to maintain the ratio of years saving for retirement to years in retirement constant, increasing contribution periods as life expectancy increases; or to increase overall contributions. This position is being bought by governments as many countries have responded to population ageing by increasing the statutory age of retirement. Some have linked retirement age to life expectancy.

The fairness of this solution, however, can be questioned when we look beyond the average. Gains in life expectancy have not necessarily been distributed equally across society. A skilled executive, for example, can expect to enjoy nearly four additional years in retirement compared to a manual labourer; this assuming that “retirement” begins at age 65.

Inequality becomes more apparent when considering the period before retirement. Not only can the manual labourer expect to receive his pension for fewer years, but he can also expect to have made contributions to the system from an earlier age, as the highly skilled worker likely spent a number of years in higher education and began working later. Given the same retirement age, the unskilled labourer pays relatively more into the system to receive his pension for a shorter amount of time.

Automatically linking retirement age to increases in life expectancy across the board may, therefore, be regressive. Life expectancy, time of entry in the labour market and improvements in life expectancy are not homogenous across the population, they vary across different socio-economic groups (e.g., low skill, low-income groups). Hence, the best approach may be to link the number of years contributing to life expectancy. Unfortunately, the data needed for this is not available across all countries and the application across different socio-economic groups may be far from straightforward but it is a better method than adding years of work before people can get their pensions.

Mr. Taylor concludes his article by saying, "In other words, Canadians may now be stuck with a retirement age that gets more out-dated with each passing year. Age is just a number, of course. But 65 stopped being the right number for retirement a long time ago." Around the world, there is some pressure to increase the age of retirement with the average age of retirement being between  62-65, but I believe Canada should not be in a hurry to move it that direction as our retirement age is already higher than most countries in the world.

Watch for more articles and studies that will take the position that we need to raise our retirement age. These positions are a response to the risk of living longer. Demand for protection against longevity risk will only increase as individuals are expected to live longer, and the sustainability of pension funds and annuities providing this protection for individuals has to be ensured. 

Sufficient provisioning for longevity is essential to guarantee that future payments will be met, and the ability for providers to manage and mitigate this risk will allow them to continue offering protection in the future.