Time to raise the retirement age

Over the past several months, news headlines have been filled with the troubles pension funds have found themselves in–this, in combination with the poor state of capital markets, will lead many individuals to consider working beyond the normal retirement age of 65 and raises the idea of institutionalizing an increase in the retirement age to all Canadians.

The major benefit of an increased retirement age accrues to all defined benefit pension plan sponsors and defined contribution pension plan participants. The number of years over which participants are able to earn and save for retirement increases immediately by the number of years the retirement age is increased and the retirement years simultaneously decrease by the same number of years.

Human longevity has increased over the past hundred years by leaps and bounds, with life expectancy in Canada has increasing from 50 at the turn of the 20th century, to 72 in the early 1960s, to over 80 in 2006. At the same time, the retirement age remained level at 65; in fact, through the 1970s and 1980s there was a noted trend toward early retirement. By institutionalizing a higher retirement age, Canada would acknowledge that supporting longer retirement years with the same number of working years is not a feasible long-term financial strategy for its citizens.

The health of the pension industry would not be the only benefit of raising the retirement age. Recent research in the U.K. suggests that healthcare expenditures would decrease as citizens maintain a higher degree of physical and mental fitness for a longer period of time. This would provide much needed fiscal relief, especially south of the border, where health costs have spiraled out of control.

Another benefit of raising the retirement age is related to demographics. As the baby boomers head into retirement, it will be difficult for businesses to replace the experience that has accrued in the management suite. By extending baby boomers’ work life, businesses have a longer period to adjust to this new reality. Therefore, pensions are not the only beneficiaries of an institutionalized increase in the retirement age.

There are many ways to implement an increase in the retirement age, with variables such as what the new retirement age should be and whether the implementation should be immediate or gradual. The most sensible way would be a gradual change over a reasonable period of time from 65 to 70. One suggestion would be a one year increase in the retirement age every three years beginning with a move to 66 in 2012.

Jonathan Jacob is managing director of Forethought Risk, which provides asset & liability management services to pension plans, insurance companies and asset management firms.

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