State pension ages are rising around the world. Most countries will increase the point at which people can withdraw payments to 67 in coming decades.
Some governments have been more aggressive. The UK and Ireland will increase the age to 68, and the British government has indicated that more even higher ages are inevitable.
The model common in most developed countries – start work at 18 to 21 and retire at around 60 to 65 – no longer looks viable as governments try to balance pension obligations with stretched public finances.
Why state pensions will become less generous
Rising life expectancies have also had a part to play. According to the World Bank, life expectancy at birth in the UK has risen from 75 to 82 over the past 30 years.
Additional pressure comes from a growing demographic imbalance where there are fewer workers for every retired person. This is not due solely to longer lifespans: the long-term trend in most Western countries is for lower birth rates.
Typically, the fertility rate required to replace an existing population is 2.1 children per woman.
According to the latest data, the average for the 35 countries in the Organisation for Economic Co-operation and Development (OECD) is 1.7. Many countries, including Germany, Japan and Spain sit at 1.5 or lower.
That means the ratio of workers to dependants – those who do not contribute economically – has fallen and will keep falling for decades.
Due to the confluence of these factors, government pension obligations have risen dramatically. At the same time, their ability to fund them has come under pressure.
Many Western nations, where pensions tend to be most generous, are waking up to this ticking timebomb
As a result, governments have been left with little choice but to drive up state pension ages. This in turn has a knock-on effect on many private pensions, which typically use the state pension age as a guide.
Lesley-Ann Morgan, Head of Retirement at Schroders, said: “Life expectancy has been marching forward in countries all around the world. It’s been happening for decades, yet normal retirement ages – the age at which people can receive state support – have barely moved. Retiring at 65 or even younger remains the norm.
“Many Western nations, where pensions tend to be most generous, are waking up to this ticking timebomb. These systems may not be affordable in some countries unless adjustments are made. The easiest route to making them more affordable is to change future retirement ages and that’s why we’ve seen a flurry of activity on this front in recent years.”
What will be your state pension age?
The rising trend is almost universal. Many countries have already raised pension ages, most commonly for women.
The table below shows the current and planned normal retirement ages – the point at which government retirement benefits can be drawn – in a number of countries around the globe. Some countries have early retirement options, based on certain criteria which aren’t shown; some have conditions on normal retirement ages. Any of today’s retirement ages that are rising and in a mid-year, such as 65 and six months for Australia or 65 and five months for Spain, have been rounded up or down.
Retirement ages around the world
|Country||Current retirement age (m/f where different)||Future retirement age||Notes|
|Italy||67/66||67+ (2022)||Link to life expectancy|
|Portugal||66||66||Link to life expectancy|
|Netherlands||66||67+ (2022)||Link to life expectancy|
|Singapore||62||62||Re-employment offered up to 67|
|Indonesia||56||65||Rising to 57 in 2019. Increase 1yr every 3 years, stopping at 65|
|South Africa||60||60||Means tested. (Single: less than R1,056,000 of assets; R73,800 of income)|
|Denmark||65||67+ (2025)||Link to life expectancy|
|Switzerland||65/64||65 (2020 proposal)||Equalisation being put to popular vote|
|Finland||65||65+ (2030)||Link to life expectancy|
|Austria||65/60||65 (2034)||Rises begin in 2024|
Sources: Finnish Centre for Pensions, Mercer, Schroders. Years are rounded up or down if in a mid-year change.
Some governments that have linked the age to life expectancy have offered estimates of how this might affect the normal retirement age, based on certain dates in the next few decades, shown in the table. Further down the line, the age could rise far higher. The Finnish Centre for Pensions, the source for some of the data, estimates that by 2050 Denmark may have the highest state pension age – at around 72.
Many countries are likely to be approaching a retirement age of 70 at that point, even if the plans aren’t yet in law. Germany, for instance, has plans to increase its age to 67 by 2029. But the Bundesbank, the German central bank, said in a report last year that this would be inadequate. It floated the idea of a further increase to 69.
The British example
The British story is not dissimilar. It’s now on to its last crop of retirees able to claim their state pension at 65. It will be set at 66 by 2020, 67 by 2028, and to 68 in 2037. As is occurring in many other OECD countries, the pension ages of women, who tend to have a lower retirement age, are being unified.
those under 30 today would be working until 70
These age hikes could be pulled forward however. The government has indicated a policy of aiming to allow British citizens to spend 33.3pc of their adult working lives in retirement, which is the basis for the rises outlined so far. It was also the basis for accelerating the rise to 68 from 2046 to 2037, announced last month.
But the British government may go further. A Department for Work and Pensions report this year referenced a “32pc scenario”. In this scenario, the state pension age could hit 70 by as early as 2054. In other words, those under 30 today would be working until 70.
But even this could be conservative.
Over the next 50 years the cost of funding the UK state pension is forecast to soar due, in part, to increased longevity. It is estimated that one in three of those born today will live to 100.
The Office for Budget Responsibility expects the state pension cost to rise from 5% of the economy in 2021-22 to 7.1% of GDP in 2066-67. The UK government already has high debts, which are the equivalent of 90% of GDP.
It’s not hard to envisage these factors forcing up the state pension age far more rapidly, or pushing the Government to make pension payments less generous.
It should also be noted that the “private pension age” – the age at which you can access your own pension savings – is also likely to rise in the UK. It is currently fixed at 55 but there are plans to link it 10 years below the rising state pension age, which would see it rise to 58by 2057.
In addition to the rising pension age, another question is whether the regular payments will be inadequate in the future. The UK already has one of the least generous state pensions in Europe, capped at a maximum of £159.55 a week, or £8,297 annually.
Other guarantees may also be eroded. A promise to increase pensions in the UK by at least 2.5% a year, regardless of inflation, may also be removed.
Earlier this year, Mark Pearson of the OECD suggested the UK should consider giving high earners less generous state pensions. “Faced with these pressures, are you going to ask people of working age to pay more, or people to work longer before they can claim their pension?” he told the Financial Times.
“Or another way to ensure an adequate pension is to think about whether the pension should only be paid to those who really need it, to ease the tyranny of the maths. Giving less [pension] to the people at the top would free up resources to increase general benefits.”
Pension plans across the world
This story is repeated across the world, and in many cases the figures make for even more damning reading.
Some countries are starting with even larger debt. The US has a debt to GDP ratio of 106%, Italy’s sits at 133%, and Japan’s is at around 250%.
Japan is arguably the biggest ticking time bomb of all, with no clear way to defuse the situation. Around 30% of people in Japan are aged 65 and over, a far higher ratio than for any other large country. That proportion will grow rapidly given the country has the highest life expectancy globally, one of the lowest fertility rates and negligible immigration.
Saving for a different future
To achieve a comfortable retirement, it would be prudent for indivduals to take on more responsibility – to create their own savings and become less reliant on state support. Research suggests this may already be happening.
The 2016 Schroders Global Investor Study, which analysed the views of 20,000 investors in 28 countries, suggested that it was the countries with the lowest expectations of state provision that demonstrated the greatest appetite to learn about investing.
In Belgium for instance, investors expected the government to provide 31pc of retirement income, but only 78pc wanted to know more about investment. In Hong Kong, investors said they only expect a state pension to make up 5pc of their retirement income, but 94pc wanted to know more about investing.
If governments start to reduce to reduce the benefits they offer, the burden will fall on individuals to make up the shortfall.
The key is to start investing as soon as you can, as much as you can. Amounts that may seem insignificant now can grow into a substantial savings in the long haul thanks to the effects of “compound interest”, where you earn returns on returns.
Calculations on investing £10,000 at different ages, assuming annualised growth of 6% after charges, underline the point:
- If you invested £10,000 at the age of 25, by the time you reached 65 the retirement account would be worth £102,850.
- If you invested £10,000 from age 30, it would grow to £76,860.
- If you waited until 40 to start, it would only reach £42,910.
Savings systems vary globally, although tax incentives to save into pensions are commonly available.
Schroders’ Lesley-Ann Morgan said: “Every country’s pension system is unique and presents its own specific challenges for an individual.
“However, for all the differences, the fundamental principles of saving for retirement and making those savings last a lifetime are very similar.
“Success depends on how much you contribute and when, and the rates of return you achieve.
“In retirement, the added complexity of an unknown life expectancy means careful planning is required to ensure those savings are both adequate and will last as long as possible.
“As for rising state pension ages, it is one aspect of a wider trend: government support for the retired will become less generous in the future.
“Individuals will need to provide more of their own retirement income. That means saving as much as they can as soon as they can. Do this in the most efficient ways, using any pension tax incentives available, and you’re giving yourself a far better chance of meeting your retirement goals.”
The above article was first published by Schroders on 23rd November 2017