Across the developed world, the demographic profile is changing. According to United Nations projections, the proportion of the global population over 65 years old will triple between now and 2100, from 7 percent to 21 percent. The population is aging more rapidly in some countries, such as Italy and Japan, and less rapidly in others, such as the United States and the United Kingdom. But in all countries, this demographic shift raises challenging new questions, not just for retirement and how it is to be financed, but also for the world of work — and the transition between the two.
Although most people understand that this change is taking place, they do not realize how large it will be and what its implications are for our working lives, for how we provide in advance for retirement, and for how support and care will be provided and funded in the future.
Regrettably, we are also prisoners of a number of assumptions that, if they were ever correct, will no longer hold in a changed world.
Assumption 1: We’ll work long enough to pay for our retirement. Not necessarily. There has been a dramatic change in the ratio of years spent at work to those spent in retirement. For example, in Britain in 1950, 83 percent of one’s adult life was spent working; 17 percent was spent in retirement. By 2050, if the retirement age remains the same, only 63 percent of one’s adult life will be spent working. We will have moved by 2050 from five years of work for each year of retirement to 1.7 years of work per year of retirement. But surveys show that, until the age of 75 or so, people consistently underestimate the length of their retirement and under-provide for it financially.
Assumption 2: As our society gets richer, we can afford to retire earlier. Retirement is viewed as a reward for our prosperity; our increased wealth, we believe, can buy more leisure. The basic flaw in this is that people are not taking into account increasing longevity and its associated higher costs. We may be wealthier, but retirement is more expensive. Many assume that their standard of living can be maintained in retirement with the help of retirement products that address inflation, such as price-indexed annuities and indexed pensions. But inflation is not the only problem for the elderly. For example, for people in the last 10 to 15 years of life, not only do health-care costs rise significantly, but new expenses are incurred for services they can no longer perform themselves, such as home repairs or landscaping.
Assumption 3: It is useful to retire people early, because there are not enough jobs for everyone. The belief that older workers must be displaced to free up jobs for younger ones was bad economics in the 1980s, and it is even more misguided now. Increased output generates more income and expenditure, and thus creates more jobs. The consequences of this “lump of labor” fallacy are serious: It fosters an ageist agenda in the workplace. Laying off workers over age 50 or forcing them to retire results in a loss of skills and intellectual capital. It also accelerates the drain on public and private pension funds.
Assumption 4: Income and status at work rise linearly, and people retire at their most senior position. In some countries, employment regulations make it difficult to continue working once you reach the age of retirement or have officially retired from the organization. Perpetuating this approach reduces organizational flexibility and promotes ageism. Yet this has been the dominant employment model, and retirement planning and final-salary pension computations maintain this no-longer-appropriate status quo.