I’m working on a longish piece on how to pay for the global financial crisis, and it seems like a good idea to deal with some side issues separately. One of the standard post-crisis responses of governments, i has been to increase the age at which people become eligible for public old age pensions. This change is likely to flow through to other policies, for example by shaping the presumptions around the tax treatment of private retirement income.
I want to step away from these financial positions and ask the question: does it make sense, in general, for people to retire at older ages than in the past? For those who want the “shorter” version, my answer, on balance, is “Yes, at least in Australia”.
There are two main factors that should influence the age at which we retire. First, improving productivity means that any given standard of living can be achieved with less work, and we would expect at least some of this benefit to take the form of an increase in leisure, including more years spent in retirement. Second, and going in the opposite direction, we are living longer and (because of higher education levels and increased difficulty of entry to the workforce) starting work later. So, with a fixed retirement age, the number of years out of the workforce is increasing, while the number in the workforce is decreasing.
At least in the Australian context, the second of these factors is dominant. In the last 30 years, the expectancy of remaining life at 60 has risen from 18 years to 24. I’ll guess that average age of entry to the workforce has also risen by about 5 years, say from 17 to 22. That implies a “typical” 1980 life course for full-time workers retiring at 65 of 48 years with 30 years pre- and post-work. The comparable figures now are 43 and 41. So, a proportion of the productivity growth in this period has been used to reduce the proportion of lifetime years spent at work, from over 60 per cent to just over 50 per cent.
By contrast, at least for full-time workers, there has been no reduction in annual hours of work. Official full-time conditions were fixed in the early 1980s at 38 hours/week with four weeks annual leave + public holidays and some long-service leave. That hasn’t changed, but there was a big increase during the 1990s in people working longer hours, and that’s been . Given that prime-age adults also have responsibility for children, this doesn’t make a lot of sense.
Those who think employment conditions reflect voluntary bargaining might argue that this apparently unsatisfactory outcome must reflect the preferences of workers and employers. I don’t buy this, at least as far as workers are concerned. But even if it were true, preferences are affected by policy settings such as pension ages. Leaving the pension age unchanged when life expectancy changes pushes people to work harder since their required savings increase. This is, on the face of it, a bad outcome. So, it makes sense for public policy to encourage later retirement, and discourage ultra-long working hours.
fn1. This assumes that time spent at school/uni should not be regarded as “work”. There are some complex issues here I’ll try to discuss more.