Setting an Ideal Retirement Age

In this article*, Sibin Sabu, looks at the factors that policymakers need to take into consideration while deciding the retirement age. The article busts certain myths related to retirement age and suggests that the traditional notion of retirement must be delinked from age. 

In the years to come, retirement age will play an increasingly important role in the framing of public policies of governments across the world.

Retirement age has direct and indirect implications on the economic and social conditions in a society. Today, we can find that it varies from a minimum of 45 years in Turkey to 70 years in Australia.¹

Determining the age for retirement is a tricky job for any employer – whether it is the government or a private firm. Several factors play a role in it.

Demography

Increasing the retirement age allows a state to make use of the productivity of the elder citizens. In fact, there is no point in forcing a healthy and experienced employee to retire early.

The term old age dependency ratio becomes relevant in this context. In simple terms, it represents the ratio of percentage of old age population to the working age population. This dependency ratio should be as low as possible and increasing the retirement age is one way of increasing the number of people in the working age population.

Countries with rising old age population would be the biggest beneficiaries of a higher retirement age. In India, states like Kerala are likely to gain most by raising the retirement age since it has the highest percentage of old age population in the country and by 2050 one out of two in the state would be over 60.²

Fiscal Burden

In India, the fiscal cost of ageing is currently at 2.2% of GDP and it is steadily increasing.³

The decline in joint family system and increasing life expectancy would place a greater responsibility on the government to provide for the old. This would have repercussions on the fiscal conditions of a state or country.

Kerala, which has the largest share of old age population in the country, spends around 35% of revenue receipts on pension. The amount spent for health care and support of the elderly would further inflate the figures. Thus, the fiscal cost of ageing in Kerala could be several times more than the all India average.

Retirement age could be adjusted to combat these costs and this will be an important tool in easing the fiscal pressure on the state.

Post Retirement Life

It is important to understand how the retired spent their time in retirement. The vocation taken up by the retired are closely linked with social factors such as culture, traditions, social security net and family system prevalent in a society.

For example, in places where a joint family system is prevalent, the retired may prefer spending their time with their family. In the absence of a joint family system, the retired would try to keep themselves preoccupied and busy by taking up some profession in their retirement.

Availability of such data will provide government with insights on the needs of the retired and their potential. However, there has been little research carried out on that front. Such a study could be included as a part of Census or in National Sample Survey Rounds.

The retirement age should be set after taking into consideration these social factors as this will enable employers and governments to leverage their potential and meet their needs to a greater extent.

Health

The life expectancy of an Indian was 32 years at the time our independence while the retirement age of Central government employees was 55 years at the time.

Today, our life expectancy has more than doubled while the retirement age has increased only by five years. As a result, the average expected time in retirement for Indians is close to 25 year and it is going to increase further in the coming years.⁴

It must, therefore, be ensured that workers who are fit are not forced out of the system. The retirement age must be in tune with the expected life expectancy and quality of life.

Nature of Profession

Some professions like mining has a lower retirement age owing to risks involved if an older person works in the mine. In contrast, MPs and MLAs do not have any retirement age. There are also some professions like Sports and Arts which do not have a formal retirement age. 

At times, years of experience is the most dominating factor in the professions - say, for example, in the case of lawyers. In such instances, it can be considered that wisdom increases with experience (i.e.,age) and hence, no formal retirement age is usually set.

Thus, different professions must have different retirement age considering the impact aging has on a particular profession.

Fears of Youth Unemployment

Often, governments are unwilling to increase the retirement age because of fear of harming the prospects of youth employment. Such a belief is based on what is popularly referred to as the ‘lump of labour theory’. The belief is that if we allow the older workers to continue, the employment prospects of the youth would be affected.

Historically, this fear has had a big influence in decisions pertaining to retirement age. Moves by the Central Government and many State governments in India to increase retirement age has faced stiff resistance from the opposition and didn’t fructify following protests and fears of hampering the employment prospects of the youth.

In other words, this is a form of discrimination in which governments prefer having an elderly unemployed than an unemployed youth.

In this context, it is important to look at whether the notion of older employees driving out younger employees is based on scientific evidence. Studies show that the belief is a mistaken one and one to be dispelled.

Researchers worldwide have failed to establish any direct correlation between a higher retirement age and youth unemployment. In fact, some studies have reported a decrease in youth unemployment with an increase in labour force participation of those above 55.^5,6,7 Therefore, contrary to popular fears increasing the retirement age can lead to a decrease in the youth unemployment rate. However, the evidence is not conclusive enough to be certain about that.

Supply of Labour Force

There have been instances when governments have been compelled to increase the retirement age due to shortage of labour force for a particular profession.

For example, the retirement age of scientists is 2 years higher than the other employees in the Central government. In West Bengal, the retirement age of Doctors was increased owing to shortage of qualified doctors in the state.

Thus, retirement age also reflects the labour supply for a particular profession. Retirement age may be raised or lowered depending on the labour supply for a particular profession.

Performance

The biggest question would be whether we need a retirement age at all. Ideally, the labour force should be given the opportunity to work as long as they are fit and performing. If retirement is linked to performance instead of age, this could lead to greater efficiency and productivity.

The same can be said about our Public Sector Undertakings. While the BSE Sensex returned 127% between 2009 and 2014, the BSE PSU Index gave a meager return of just 20% in the same period.⁸ One of the major reason is the security that these jobs offer which has led to a lack of emphasis on performance. Thus, a person getting into a government job will usually continue until he retires irrespective of his performance.

Setting a formal retirement age, therefore, has several unintended negative consequences. It can be argued that the traditional notion of retirement must wither away.  Retirement must be delinked from ‘age’ and linked to ‘performance’.

By,

Sibin Sabu

Research Assistant

Centre for Public Policy Research, Cochin

*The article was first published by Centre for Public Policy Research

References:

1.      http://beforeitsnews.com/alternative/2013/07/top-10-countries-with-a-low-retirement-age-2712562.html

2.      Kerala Development Report by Planning Commission, Government of India (2008)

3.      Crisil: When India Ages, Whither Pension for All? http://www.crisil.com/private-sector-pension-coverage/PPT/private-sector-pension-coverage.pdf

4.      Pensions at a Glance 2011, OECD  http://www.oecd-ilibrary.org/docserver/download/8111011e.pdf

5.      IZA WOL:

http://wol.iza.org/articles/effect-of-early-retirement-schemes-on-youth-employment.pdf

6.      When Baby Boomers Delay Retirement, Do Younger Workers Suffer? http://www.pewtrusts.org/~/media/legacy/uploadedfiles/wwwpewtrustsorg/reports/economic_mobility/EMPretirementdelaypdf.pdf

7.      Releasing jobs for the young? Early retirement and youth unemployment in the United Kingdom http://www.ifs.org.uk/publications/4746

8.      http://www.firstpost.com/business/money/psu-etfs-why-would-you-want-to-own-a-basket-of-govt-owned-stocks-1963623.html

9.   http://lawyerslaw.org/supreme-court-ruled-no-retirement-age-for-lawyers/ 

Syrian Refugee Crisis: Lessons from the Nordic

The civil war in Syria, sparked in 2011 by the Arab Spring, continues to get worse. An estimated 4 million Syrians have already fled their homeland and four times the number is in need of assistance - inside and outside Syria. Discussions on the best course of action to deal with the situation are ensuing around the world. There are many who feel that refugee influx could place a greater stress on government finances and even pose a threat to national security. There are others who believe that countries should have an open door policy towards refugees out of humanitarian concern. 

At this juncture, it would be of interest to note how some countries have dealt with refugees in the past and the repercussions it caused in their economy. Lessons can be drawn from their experiences. Nordic countries, sometimes referred to as the Scandinavian countries, are a compelling case study.

Introduction to Nordic Development Model

 Before going further, it is important to have a basic understanding about these countries. Nordic countries – Denmark, Finland, Iceland, Norway, and Sweden – have almost everything that any country would aspire to have. They have a highly successful mixed model of development. The Economist considers them as ‘The next supermodel’ – one which ‘injects market principles into a welfare state’.

 They have one of the freest economies in the world. There is near zero government intervention or regulation of businesses. People are given maximum possible freedom to pursue their interests. For these reasons, the Scandinavian countries have consistently featured among the best in the world in almost all rankings measuring “liberal” parameters.

 At the same time, these countries have exceptionally high tax rates of around 50% and a very large government sponsored welfare system. These countries are known for their remarkable social security net offered to citizens.

 Unemployment allowances, housing allowances, affordable education and health care, generous paid leaves (including paternity and maternity leave), subsidized child care are some features of the Nordic model. To a socialists delight, these countries are the best performing in the “socialist” parameters as well. They have set the benchmark for the rest of the world with their very high HDI, very low economic inequality and very high social mobility.

Response to Refugee Crisis

 Their welfare model had one limitation – it was designed for a small and homogenous society. These countries had a relatively homogenous population and a close to utopian economy since late 1990s. They even withered the recent great financial crisis without hassles. But, things began to change when the Syrian civil war started and they began dealing with the refugee crisis. Each of the Nordic countries dealt with it differently. Sweden, for instance, decided to have an open door policy for refugees welcoming everyone. Norway on the other hand, went for a cautious approach – welcoming only select refugees.

 While Sweden’s open door policy was a great gesture from a humanitarian perspective, they did not guard their economy against the consequences arising from such an action – the stress it put on their welfare model. Their experience dealing with refugee crisis urges one to be cautious. 

Profile of Host Country

The first lesson that these countries provide is the need to identify how well equipped the state is in order to receive the refugees. To assess its capacity, a country would have to consider factors such as population density of the country, demographic profile, size of the economy and the size of public expenditure towards welfare.

 Countries having an unfavourable dependency ratio (shortage of labour force) should be more willing to take in refugees, so long as the refugees fit the requisite demographic profile (age and skill set). This could have a net positive impact on their economy.

 Countries which spent less for public welfare and entitlements might face lesser financial risk in accepting refugees.  However, Governments – like those in the Nordic – offering large welfare benefits are likely to experience greater stress on their finances due to refugee influx.

 Questions on how the refugees will earn their living needs to be answered as well – whether they would be able to find suitable employment and to what extent they will be reliant on state finances.

 Owing to the very high cost of living, it is virtually impossible to live in these countries without a job that pays decently. That is where some of the Nordic countries like Sweden failed. There weren’t enough jobs on offer for these immigrants to take up. As a result, unemployment rate shot up and this in turn placed great stress on their welfare model. The refugees contributed little back to the economy and had to rely on the state welfare system.

 Reliance on the tax funded government welfare machinery, led to dissent from some sections among Swedes who began to feel that that the refugees were getting disproportionate benefits out of the large taxes which they paid. This led to a whole new crisis which escalated to such an extent that immigration policy was the focal point of discussion during elections in Sweden last year. Dissent among citizens against refugees can have far reaching consequences –politically and socially.

Integration of refugees into local community

 This gives us the second lesson – the easiness with which refugees can integrate into the local community. That is, how the people in the state would respond to the new situation – or the preference and choice of the public. This would be pivotal when the government makes decisions regarding immigrants. At the end of the day, it is the public’s attitude that is reflected in the decisions taken by the government.

 The identity of the state and the attitude of citizens towards immigrants are of utmost importance. People in the Nordic countries are generally known for taking pride in their humanitarian efforts. Some aspire to be recognized as the ‘moral guardians of the world’. It would be easier for refugees to integrate into a community that welcomes them wholeheartedly, rather than treating them as intruders or outcasts.

The willingness of people to share their resources with the refugees should be taken note of. If the public shares such humanitarian concerns, it will be easier for the government to take proactive measures to welcome refugees.

 But at the same time, government funding is all about priorities. During a survey, majority of Danes opined that immigrants are coming to their country seeking welfare benefits on offer. This, they felt would leave little funds to provide pension entitlements for the poor Danes in their country. As a result, government decided to divert resources to fund the needy amongst their own citizens.

 From the perspective of refugees, they would be in dire need of state support to facilitate their integration into the local ecosystem – the local community and the local economy. Going into a country which does not offer any welfare support would be nightmarish for them. They would prefer countries offering greater welfare benefits.

Quality and Profile of Refugees

 The third important lesson is concerning the quality of immigrants being accepted – their profile, health conditions and background.

 Norway, despite having the largest sovereign wealth in the world, was cautious in accepting refugees. They admitted refugees only after a careful screening process. Some applications were rejected by the Norway government as their medical conditions were considered too serious for their health system to manage. They also deported some refugees over national security concerns.

 At the same time, it should be asked whether Norway could have borne greater risk and taken in more number of refugees – given their financial capacity. Moreover, there would always be refugees who are medically critical and who those are not in a position to earn a living by themselves. According to Washington Post, more than 46% of refugees are children, and a majority of them are under the age of 12.

Thus, countries which look for net benefit will not be keen to take in refugees. There is a case for equitable distribution of such refugees – possibly, by random selection – across different countries. The debate over Citizen Rights versus Human Rights assumes great significance in this context.

Role of International Organizations

 Thus, the fourth and most important lesson is that what is best for an individual country may not be the collective interest of the world at large. Amnesty International has reported that, as of September 2015, around 95% of the Syrian refugees are in just five countries - Turkey, Lebanon, Jordan, Iraq and Egypt. The responsibility of humanitarian action in the Syrian refugee crisis should not be limited to the EU countries or a select few countries in the vicinity. In our globalised economy, it is inevitable that countries share the risks involved when dealing with humanitarian crisis of this scale. Having a weak link (like Syria) is unaffordable as it puts the entire global economy at risk. This calls for greater role of international organizations like the UN.

 These organizations can try to come up with a framework assessing the refugee intake capacity of different countries and ensure more efficient distribution of refugees. They can consider setting up a humanitarian fund for such dealing with refugee crisis since a major concern would be related to financing the integration of refugees into the local economy. Countries presently unaffected by this crisis would also do well to be prepared for such contingencies that may arise in future.

By,
Sibin Sabu

sibin0409@gmail.com