Tuesday, June 12, 2012

OECD Pension Outlook: Work Longer Before Retiring and Smaller Public Pensions.

The OECD says that governments will need to raise retirement ages gradually to address increasing life expectancy in order to ensure that their national pension systems are both affordable and adequate. Even so, the OECD report "Pensions Outlook 2012" finds that reforms over the past decade have cut future public pension payouts, typically by 20 to 25%.

According to the OECD, over the next 50 years, life expectancy at birth is expected to increase by more than 7 years in developed economies. The long-term retirement age in half of OECD countries will be 65, and in 14 countries it will be between 67 and 69. The report states that increases in retirement ages are underway or planned in 28 out of the 34 OECD countries, but these increases will only keep pace with improved life expectancy in six countries for men and in 10 countries for women. Thus, OECD calls on governments to consider formally linking retirement ages to life expectancy, as in Denmark and Italy, and make greater efforts to promote private pensions.

Private pensions are not a panacea either, as OECD notes that in countries where public pensions are relatively low and private pensions voluntary, such as Germany, Ireland, Korea, Japan and the United States, large segments of the population can expect major falls in income upon retirement.

The report also includes the first comprehensive evaluation of national defined contribution systems. These are:
now a central feature of many countries’ pension systems. Among other recommendations, the report argues that it is critical to set the minimum or default contribution rate in Defined Contribution systems at an appropriate level.

Contributions to these systems need to be high enough so that together with public pensions they generate sufficient income at retirement. While Australia is moving in the right direction by increasing its contribution rate from 9% to 12%, it remains too low in countries such as Mexico and New Zealand (6.5% and 3%, respectively).
Source: OECD News Release (June 11, 2012). See also, OECD, Media Brief.

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