Two-thirds of pension reforms
in OECD countries in the last 15 years contain measures that will automatically
link future pensions to changes in life expectancy. This quiet revolution in
pension policy means that the financial costs of longer lives will be shared
between generations subject to a rule, rather than spreading the burden through
potentially divisive political battles as happened in the past. As a result,
nearly half of OECD countries (13 out of 30) have an automatic link 10 between
pensions and life expectancy in their retirement-income systems, compared with
only one country (Denmark) a decade ago. Indeed, the spread of this policy has
a strong claim as the major innovation in pension policy in recent years.
A paper of OECD projects
life expectancy 50 years into the future. The central forecast is for additional
life expectancy for men at age 65 (the typical standard pension age) to increase
from 15.1 to 18.5 years. For women, the projected growth is from 18.7 to 22.2
years. However, these forecasts are uncertain. In the best 5% of cases, life
expectancy for men is projected to be 20.1 years or more, compared with 17.1
years or less in the worst 5% of cases. The degree of uncertainty for women
is similar to that for men. These calculations underpin an analysis of how pension
entitlements vary under the different scenarios for life expectancy and then
on how life-expectancy risk is shared between individual retirees and pension
providers. The results show great diversity among the countries with links between
life expectancy and pensions. According to OECD, it is hard to see why people
approaching retirement should not bear at least some of the cost of their generation
living longer than previous generations: living longer is in itself desirable.
The optimum amount of lifeexpectancy risk that individual retirees should bear
is therefore not zero. However, each individual has a lifecycle that includes
periods as a contributor and as a beneficiary. There is a trade-off: greater
certainty over retirement benefits versus greater certainty over the amount
of contributions or taxes paid when working. Together, these factors suggest
that individual retirees should bear some but not all life expectancy risk.
The paper concludes by
analysing which of the 17 OECD countries without a link to life expectancy in
their pension systems might consider adopting such a policy and what lessons
they might learn from the experience of countries that have already implemented
it.
Source : http://www.age-platform.org
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