Over the next 50 years, life expectancy at birth is expected to increase by more than seven years in developed economies. While this is good news for many, it will also be a strain on pension systems. To be sure, governments will need to address increasing life expectancy by raising retirement ages gradually. This is a key conclusion of the first Pensions Outlook 2012, a new OECD report which looks at the future of pensions.
Denmark and Italy actually link retirement ages to life expectancy, a policy that others may need to consider. But even this is not enough. Governments will also need to make greater efforts to promote private pensions. Indeed, reforms over the past decade have cut future public pension payouts, typically by 20% to 25%. This means that on average in OECD countries, people starting work today can expect a public pension to cover only about half their net earnings, if they retire after a full career and at the official retirement age. Better to be in one of the countries that have made private pensions mandatory, for there, pensioners can expect benefits of around 60% of earnings.
The outlook for pensions is more worrying in countries where public pensions are relatively low and private pensions voluntary, such as in Germany, Ireland, Korea, Japan and the US. Here major falls in income upon retirement will be commonplace, potentially driving up poverty in old age. Encouraging private pension savings will be essential, Pensions Outlook 2012 believes. Facilitating matching contributions or giving flat subsidies to savers, such as in Germany and New Zealand, would improve incentives to contribute.
The inaugural edition of the Pensions Outlook also includes the first comprehensive evaluation of national “defined contribution” systems, which are now a central feature of many countries’ pension systems. Contributions to these systems will need to be made high enough in many cases so that together with public pensions, they generate sufficient income for retirement periods that might very well prove lengthier than many pension systems originally bargained for.
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