The last decade has seen most countries in the rich world raise the retirement age in order to improve the sustainability of their pension systems at a time when people are living longer, healthier lives. The policy is moving in the right direction, but it has one key flaw — current policies are too rigid.
Retirement should not be a one-size-fits-all system where those who work longer or retire earlier are penalized. Provided they get it right, governments and citizens have much to gain from a more flexible pension system than exists in most countries today.
According to a study published last week from the Organization for Economic Cooperation and Development, the average retirement age for men across OECD member states is set to go up to 65.8 years from 64.3 years today.
This follows a gradual increase in the recent past: Over the last decade and a half, the average age at which workers left the labor market has gone up by two years. That said, there is a great deal of variation, from Korean men who leave the labor market, on average, at 72, to French men, who retire at 60.
There are two reasons why governments in advanced economies are forcing workers to retire later. The first is the overall increase in life expectancy: On average, a man aged 65 can now expect to live five years longer than he could four decades ago.
The second is to correct the mistake most governments made in the 1970s and 1980s in introducing early retirement schemes in an attempt to bring more youth into employment. As a result, the average labor market exit age today is still lower than it was four decades ago, when people could expect to live much less.
This combination had made pension systems across the rich world unsustainable, forcing governments to shut down early retirement routes and raise the pension age. The trouble with the new approach, however, is that it often fails to give workers adequate flexibility over their retirement choices.