My Observation Book!: 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.^5,6,7Therefore, 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