70 OR BUST! THE ECONOMIST'S CASE FOR RAISING THE RETIREMENT AGE TO 70

The Economist


The cover story on the newest edition of The Economist, published online Thursday and probably not in “dead-tree” editions until early this week, is entitled 70 or bust!


The influential weekly British newspaper argues “current plans to raise the retirement age are too timid. Governments must go much further.”


By further, it means raising the retirement age to 70, which is a good half-decade beyond the “traditional” retirement age of 65 and 15 years longer than the magic 55 enjoyed only by a handful of fortunates who joined Defined Benefit pension plans early in life and stuck with it.


The lead editorial blames “demography and declining investment returns” as factors conspiring to keep workers chained to their desks longer than most expect or hope.


It notes the life expectancy of the typical 65-year old has improved by four or five years since 1971, a prospect that hit home this week in news stories about centenarian teachers who have collected pensions for more years than they paid into them.


That’s not mentioned by The Economist‘s package of pension stories but there is another oblique reference to Canadian pensions. A sidebar notes the most siblings to reach pension age were 7 sons and 12 daughters born to the Theriault family in Canada between 1920 and 1941: all were still collecting Government pensions in 2007, at which point their ages ranged from 66 to 87.


In another telling sidebar, it says the first American to receive a monthly Social Security cheque was Ida May Fuller, who paid in just $24.75 and had received $22,888.92 by the time she died at age 100.


Secure DB pensions eclipsed by risky DC ones


There’s familiar coverage of the steady decline of Defined Benefit pensions and the corresponding rise of Defined Contribution plans that put more market risk on the shoulders of workers. It concludes workers will need to “fend for themselves,” particularly the massive middle class.


It ruefully reminds us the rich don’t need to worry about retirement while the poor will be supported by the state. Those in the middle used to rely on lifelong employment with firms hosting DB plans but few can do so in modern times. Unfortunately, the amount most have saved in DC pensions or their equivalent (the Canadian RRSP or American IRA) has been woefully inadequate, and what little has been stashed away has suffered from disappointing investment returns.


3 reasons for working longer


Hence the inevitable if depressing conclusion: keep working. The magazine suggests Europeans should raise the retirement age to 70 by 2040 while a slightly younger America could afford to “keep it a smidgen lower.”


Society reaps three big advantages by raising the retirement age: workers get more years of relatively higher wages; the government gets all that extra income tax revenue on those earnings and simultaneously pays out less in benefits; and the economy grows faster.


The challenge, it concludes, is to have high enough state pensions that the elderly who failed to save can survive “without penalizing those who have been thrifty. That is the least people deserve in return for toiling until they are 70.”


That goes right to the heart of the pension debate now occurring in the Canadian election. All three major parties promise to hike the Guaranteed Income Supplement for poor seniors who failed to save. Meanwhile, at the other extreme, the Conservative government is trying to help those who do work and save by doubling contribution amounts in Tax Free Savings Accounts.


The DB vs DC pension debate is also central to the election, since the Liberals want to expand the DB-like Canada Pension Plan but also offer an RRSP-like publicly administered DC plan. The Conservatives want to make it easier for smaller companies to offer workers “pooled” Registered Pension Plans that will likely be DC-like.


No doubt many will conclude private-sector taxpayers should keep working till 70, even as politicians and public-sector workers enjoy full retirement a good ten years before that.


Jonathan Chevreau

National Post
Apr 12, 2011