What’s happening to Pension Ages in OECD countries?

The Organisation for Economic Cooperation and Development (OECD) has published its fourth edition of "Pensions at a Glance" (2011) which compares the policies of 34 member countries. This short article summarises key points from the report in relation to how countries are managing the age of eligibility for public pensions – a topic of keen debate in New Zealand.

"Pensions at a Glance" broadly describes how OECD members are dealing with what Bill Clinton in his 1999 State of the Union address called a "high class problem". As the OECD puts it:

"Retirement used to be a luxury enjoyed only by the few; now it is an expectation for the many. The huge increase in life expectancy in the 20th century is a wonderful achievement....however, when added to the decline in the birth rate the result is rapid population ageing and a rapidly growing cost of paying for pensions".

The OECD asks the question: "how can governments maintain retirement‐income adequacy without endangering financial sustainability?" then identifies three main routes:

1. Have people spend more years in the workforce (and so pay pensions for a shorter period) by:
   1. Raising the pension eligibility age;
   2. Reducing incentives for people to take their pension early (there are no such incentives in New Zealand)
2. Concentrate efforts of public provision on the most vulnerable (i.e. redistribution). The OECD uses New Zealand, along with Canada and the Netherlands, as examples of countries that have achieved low rates of income poverty in old age while spending a relatively low proportion of GDP on public pensions. In New Zealand’s case, this redistributive effect is largely due to the universal nature of New Zealand Superannuation (NZS)
3. Shift more responsibility from government to individuals to save for their retirement, given the prospect of public pension expenditure needing to be reduced. Although KiwiSaver is currently a voluntary scheme and there are no plans to reduce the level of NZS, the introduction of KiwiSaver is an example of a measure to encourage more individuals to save more for retirement.

In an editorial at the front of "Pensions at a Glance" the report’s principal authors conclude that:

"The public sector’s role in providing incomes in old age will remain very important, but will diminish. Working longer and private pensions will inevitably have to fill the gap…Taking the long view, a diversified pension system – mixing public and private provision, and pay‐as‐you‐go and pre‐funding as sources of finances – is not only the most realistic policy but the best policy".