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.
Assumption 5: We accumulate assets while working and spend them during retirement. People tend to invest in equities when younger, then shift toward annuities and other fixed-income instruments as they age. Yet we cannot afford to stop growing our income base too soon. A secure income at 65 is unlikely to compensate for a long decline in relative income over 30 years of retirement. Some of the money we are not drawing on in the early years of retirement still needs to be invested in growth-oriented funds or stocks, particularly if the size of our pension pot at retirement is not adequate.
Assumption 6: During retirement we won’t change residences more than once. The home we live in when we retire may be great for fit, car-driving 60-year-olds, but could become unsuitable later. In many countries, however, there is a dire shortage of housing stock to accommodate the different stages of old age, especially as mobility decreases. Consequently, many older people continue to live in houses that are too big, are too ex-pensive to maintain, and may pose hazards to them.
Assumption 7: The state will provide social and health-care services for us in our later years, allowing our children to inherit a significant portion of our estate. The shift in demographic ratios will make public social and health-care services extremely expensive. By 2050, the U.S. will have 2.6 people of working age for each person over 65. In the U.K., there will be only 2.2 people of working age for each retiree, compared with 5.2 in 1950. As a result, governments will be forced to reduce their commitments by insisting on the use of personal assets to pay for care before help from taxpayers is invoked.
As we have seen, many of the individual and collective assumptions about work and retirement are no longer valid. For a couple who reach the age of 65, there is a 50 percent chance one of them will survive to the age of 90, and a 17 percent chance that one will reach 100. We must recognize that long lives are no longer unusual and plan for such a future.
For the individual, that means saving more and not fully counting on state care, corporate pensions, or inheriting a parent’s estate in its entirety. We also must be prepared to work longer, to keep learning, and to be flexible. This may involve giving up a senior position for a less demanding one, or deferring all or part of one’s pension in order to tap better retirement income later on when the need for it is greater.
For this to occur, however, organizations must change as well. Leadership models need to be reconfigured so that management responsibilities can be transferred to younger staff. New advisory or client-facing roles could be created for senior managers so firms can continue to benefit from older employees’ experience and judgment after those individuals have handed over the reins.
Addressing the issue of our aging population is a matter for society as a whole. We need to remove restrictions on how pensions are drawn and provide retirement-financing products better suited to the longer lives of the elderly. Pension plans — both public and private — must rescind incentives for early retirement and should offer full actuarial value to those who choose to defer retirement. Annuities need to contain provisions for growth after retirement while controlling risk.
Changes are already afoot. Retirement and pension ages in many Organisation for Economic Co-operation and Development (OECD) countries are starting to increase. Legislators in the United States and the European Union are under constant pressure to tackle age discrimination. Restricting compulsory retirement will foster — or force — changes in work culture and minimize ageism. Our mental model is already changing from one of a “cliff edge,” with an abrupt change from work to retirement, to more of a “plateau.”
But the bigger question remains: Are we prepared to live with the new assumptions that this demographic shift will require of us?
Lord Andrew Turnbull ([email protected]) is a senior advisor to Booz Allen Hamilton based in London. Between 2002 and 2005, he was secretary of the Cabinet and head of the Home Civil Service in the United Kingdom.