OECD pushes need for life expectancy link to pensions
GLOBAL - Seventeen OECD countries have yet to implement some form of link to life expectancy against pensions, yet doing so might be a way for governments to convince individuals that they must bear some of the cost of providing for retirement, suggests a report produced by the OECD.
A paper was presented to the International Conference of Actuaries and Statisticians this week by Edward Whitehouse, head of the OECD’s pension policy analysis team, which suggested 17 of the 30 OECD countries could ensure there is a better balance of risk management towards pensions costs if governments were to implement an automated link between pensions and life expectancy, and do so in a way which may not then cause uproar among voters.
Whitehouse argued in his presentation, entitled life expectancy risk and pensions, “it is hard to think of a convincing reason why people approaching retirement should not bear at least some of the cost of their generation living long than previous generations”, but stressed it is “unlikely to be optimal” to force retirees to carry all of that risk.
Instead, his analysis of the 13 counties which have implemented some form of balance - Australia, Denmark, Finland, France, Germany, Hungary, Italy, Mexico, Norway, Poland, Portugal, Slovakia and Sweden - suggests counties such as Austria, Greece, Luxembourg and Spain in particular ought to consider one of four options for tying pensions and mortality rates, as it might “provide a rationale for cuts in benefits that voters find both credible and reasonable” and make lower pensions “politically palatable”.
The four automatic links could be achieved either through defined contribution plans as seen in Denmark and Hungary, by adopting notional accounts like those in Italy and Portugal, by adjusting benefit levels in DB schemes, as they do in Finland and Germany or by changing qualifying conditions, as experienced in France and Denmark, said the report.
Whitehouse’s analysis of OECD pension systems suggested some form of link might be necessary as his team’s research into projected life expectancy for 2052 indicated men could live to the ages of between 82.1 and 85.1 while women will live to be 87.2 on average, with the same degree of variance.
He acknowledged life expectancy alone must be the only determining factor of expected retirement income as countries with defined contribution schemes, for example, leave individuals more exposed to the ravages of the investment markets, along with inflation risk and labour-markets risk among others.
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