The Organisation for Economic Co-operation and Development (OECD), a global forum advocating for sound fiscal policies, recently released a report, Pensions Outlook 2012, that recommends governments raise the retirement age to address increasing longevity and keep national pensions healthy.
According to the Paris-based organization, over the next 50 years, life expectancy at birth is projected to rise by more than seven years in developed countries. In half of OECD countries, the long-term retirement age will be 65, while in 14, it will be between 67 and 69. The group further points out that increases in retirement age ceilings are underway in 28 out of 34 OECD nations. Yet those changes are expected to keep pace with improved life expectancy in only six countries for men and in 10 for women.
Therefore, the report urges countries to formally link retirement ages to heightened longevity, as Denmark and Italy have done.
Another recommendation is to promote private pensions. However, the report states that making such plans compulsory is not the answer for every country since it could unfairly affect low-income earners and be perceived as an additional tax. A better method may be to automatically enroll workers into private pensions from which they could opt out within a certain time frame.
Encouraging tax reforms that make putting savings into private pensions more favorable as well as better government oversight of how those funds are managed would also help. Enabling matching contributions by companies or giving flat subsidies to savers, which is already done in Germany and New Zealand, would also incentivize contributions.
Over the past decade, reforms have reduced future public pension payouts between 20% and 25%, the report finds. Consequently, people in OECD countries starting work today can expect a net public pension equal to about half their net earnings on average if they retire after a full career and at the official retirement age.
Yet in nearly all of the 13 countries that have made private pensions mandatory, pensioners can expect benefits of around 60% of earnings. But in those countries where public pensions are relatively low and private pensions voluntary, such as the U.S., Germany, Ireland, Korea and Japan, “large segments of the population can expect major falls in income upon retirement,” OECD researchers write. “This could cause pensioner poverty to increase significantly. Later retirement and greater access to private pensions will be critical to closing this pension gap.”
The OECD report also looks at national defined contribution (DC) systems, which are now a central element of many countries’ pension systems. Setting the minimum or default contribution rate in DC programs is critical, the group argues. If set high enough, these programs in tandem with public pensions can generate enough income at retirement. For example, Australia has increased its contribution rate from 9% to 12%. But in Mexico (6.5%) and New Zealand (3%), it remains too low, the OECD concludes.