Credit Suisse Publishes Study Urging Rethink On Retirement

The Credit Suisse Research Institute (CSRI) has published a study calling for an urgent rethink on retirement provisions in the face of aging societies.

Rising life expectancies and falling fertility rates have led to aging populations becoming a reality in many countries across the globe. What has so far primarily been an issue in developed countries is also becoming a concern for the developing world.

Governments worldwide will have to address questions associated with aging societies: how to ensure financial security for a growing number of retirees and how to establish a sustainable pension system for future generations.

In its latest report, the CSRI takes an in-depth look at the most important pension and retirement-related questions and trends.

Specific findings include:

* Changing demographic profiles are putting pressure on existing pension systems around the world. Policymakers have faced increasing opposition to reform pension systems. However, the longer the debate is delayed, the more difficult it will become to reverse the negative consequences of postponement.

* The most expedient approach to increase the sustainability of pension provision should be a gradual increase in retirement age. This would simultaneously extend the savings phase and shorten the average pension-payment period.

* Chronological age (determined by the calendar date a person was born and measured in days, months and years) fails to capture information about the well-being of an individual. Basing normal retirement age on a universal and rigid threshold does therefore not live up to the multidimensionality of age.

* The traditional concept of the three-stage lifecycle - education, working life and retirement - should be reconsidered and increasing provisions made for new forms of work (e.g. part-time or temporary employment) and further education that can ease the transition into a longer working life.

* Many pension systems are still too rigid to respond to the needs of a changing society and will have to become more flexible to cover a wide range of different cases - particularly for those in non-standard work arrangements. These workers tend to have lower or even no occupational pension coverage.

* A cross-country survey of attitudes toward retirement shows rising concerns about the sustainability of social security. Especially in developed countries, younger cohorts expect retirement provision to become less important as a source of income in old age and see earnings from work more and more as their savings plan for the future. The wish to continue working beyond normal retirement age is more pronounced in developing countries. This can be put down to existing pension schemes providing little or no financial support at old age. At the same time, people in these countries have been less used to retirement as a work-free stage of life.

Oliver Adler, Chief Economist Switzerland at Credit Suisse commented: "Pension systems are under pressure to provide retirees with financial security in old age, whilst addressing the challenges of increasing life expectancy and demographic change. Each country faces a unique challenge in ensuring that pension systems are sustainable and typically a mixture of measures are required so that pensioners can continue to enjoy the standard of living they are accustomed to. We need to redress the way we look at retirement and the collective effort required to ensure an equitable and sustainable future is possible for all."

Detailed findings

1. Aging societies and the retirement wave

* People are getting older by the decade. Both developed and developing countries will face the problems associated with an aging population. While developed countries are seeing the impact first, the developing world will go through this process at an even faster pace.

* As a result of declining fertility rates and increasing life expectancy, the proportion of retirees in the population has risen. The share of 65+ in the developed world has increased from 7.7% in 1950 to over 19% today and is estimated to reach roughly 27% by 2050. In contrast, the ratio stood at 3.8% in developing regions in 1950 and is projected to increase to 7.4% in 2020.

* Particularly affected by this development is the pension system, where an increasing number of pensioners contrasts with a continuously declining number of financial contributors. To compound matters, benefits have to be paid out for a longer period of time. But the labor market will also have to face the repercussions of this wave of retirement. Without progress in productivity, this development will also have a negative impact on economic growth.

2. The long way to sustainable retirement

* Given the long-known financial sustainability issues, many countries have taken steps to improve their pension systems. Among the broad reform trends in the past decades is a move from defined benefits to defined contribution systems.

* In general, the following four options can make pension systems more sustainable. First, people could be encouraged or forced to save more for retirement during their working life. Second, additional funds could be mobilized by increasing taxes. However, given already high taxation in many OECD countries, this approach is unlikely to provide a solution, especially if negative work incentives from higher taxation or tax avoidance are considered. Third, raising the retirement age would be an obvious approach to reducing funding gaps, and could be complemented by incentives to encourage people to work longer. Fourth, people might accept lower pensions in the future in order to guarantee long-term sustainability of the system. Typically, a combination of measures will be required to ensure that future pensioners continue to enjoy the standard of living they are accustomed to.

3. Age is not what it used to be

* We define our age by what stands on our identification card, a number given to us based on how many years we have been on this planet. This is a unit of measurement which is unaffected by the era we live in, a number which does not reflect our subjective well-being.

* The division of life into three stages - education, working career and retirement - was established around the turn of the 20th century. Over time, retirement has evolved into an integral part of people's lives. The absence of retirement is hardly imaginable in developed countries today, but is still a reality in many developing countries.

* Where policymakers fail to address the multidimensionality of age, such policies can lead to inequality, creating winners and losers: while healthy people will enjoy the benefits of longer working lives, people who are less healthy may be seriously challenged by additional years in the labor force, and not working leading to a reduction in old age income.

4. Attitudes toward retirement

* Based on the second Credit Suisse Progress Barometer Survey, a representative poll conducted online to determine how people perceive progress and their country's future sustainability, concerns are growing around the world about the quality and sustainability of social security, overall.

* People in developed countries seem to be more concerned about the sustainability of their retirement systems. They are aware of the need for painful reforms and have already seen some measures implemented in their own countries. Consequently, their expectations regarding retirement benefits in the future are somewhat lower. On the contrary, in several developing countries, retirement systems are still maturing and younger generations expect to achieve better coverage. Retirement provision in these countries has not been a reality for many people and they are generally not used to relying on it.

5. The changing face of retirement

* For much of human history, life has consisted of - at most - two stages: education and working. It is only during the past century that retirement has completed the three-stage lifecycle in many countries worldwide. With life expectancies on the rise, the traditional three-stage path may not suit the new reality.

* Enabling new life paths in a multiple-stage approach is an option that could make a prolonged working life much more attractive and hence help to alleviate the strain on pension systems. This also brings new challenges: people need to invest regularly in their skills and health to remain employable.

* To conclude, non-standard work arrangements offer possibilities to prolong working careers, while at the same time posing a risk if workers rely on them excessively in a multi-stage lifecycle or they are insufficiently covered by pension schemes. The difficulty here is to design pension systems in a way that suits the needs of an increasingly heterogeneous group of workers.

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About the Credit Suisse Research Institute

The Credit Suisse Research Institute is Credit Suisse's in-house think tank. The Institute was established in the aftermath of the 2008 financial crisis with the objective of studying long-term economic developments, which have - or promise to have - a global impact within and beyond the financial services. Further information about the Credit Suisse Research Institute can be found at www.credit-suisse.com/researchinstitute.

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