Pension Economics and the Four Pillars: Success in a Never-Ending Challenge

10. Work beyond 60: the adaptation of working conditions to longer working lives

In the longer-term, the extension of work life that gradual retirement makes possible will generate a fourth Pillar of retirement, i.e. income from flexible part-time work after the retirement age. Productive ageing is a useful concept for it conveys the idea that older persons could continue to make an economic and social contribution, and in a manner that benefits their physical and mental health and social inclusion.
Increasingly, employers are starting to adopt a longer-term view, realizing that it makes good business sense to retain and motivate older workers. This new age management, achievable through career planning, training, ergonomics and work-time reduction, not only benefits workers at end of career, but implies an overall reappraisal of the work-life cycle in order to adapt occupations to the abilities and needs of the life-long worker. On these issues, we have been able to collaborate with several important organizations, such as the ILO, ISSA (International Social Security Association), the OECD, the European Foundation for the Improvement of Working Conditions, EurolinkAge, the European Parliament, the UN Economic and Social Commission for Europe, and various universities and research centres.
With the GINA (Geneva International Network on Ageing), in November 1998 we organized an important Seminar on Productive Ageing: The Future of Pensions and Retirement, at the ILO in Geneva. Following an interesting debate at this seminar, we prepared a publication accessible to the broader non-expert public, in French first in 2000, then an updated English version in March 2002: Les retraites en 10 questions — L’avenir des retraites et de la retraite, 2000. The future of pensions and retirement — 10 Key Questions, 2002.
We also contributed to several pieces of research on the new and important issue of employment at end of career and wrote several reports, articles and chapters of books on the issues. One recent example of these studies (some are mentioned in Section 4) is the research we did for the Foundation Avenir Suisse based in Zurich on Promoting Longer Working Lives in Europe. The study focused on good practice in public and company policies to increase the participation rate of senior workers on the labour market, with the example of four countries: Finland, Denmark, France and the United Kingdom. Three outside experts contributed to the research. A press conference and an expert conference were organized in Geneva in June 2002 to present the results of this study: Encourager une vie professionnelle prolongée; Geneviève Reday-Mulvey, Report to Avenir Suisse, Zurich, 2002.
With its research programme on The Four Pillars, The Geneva Association was able through research, seminars, publications and networking to:
• advocate maintaining the first pillar pensions at a reasonable level;
• encourage the development of second and third pillar pensions;
• devise ways of making a longer working life on a flexible basis possible, that is, establishment in the long-term of a fourth pillar and in the medium term of the practice of gradual retirement.
Based on this work and a conference we organized in March 2003 in Vienna together with the Club of Rome, our Research Director for the Four Pillars Programme, Ms. Geneviève Reday-Mulvey, will publish a new book on the future of retirement called Work Beyond 60. It shall be available as of March/April 2005 and will regroup a lot of the results of The Geneva Association’s work of the past years.

11. Pension economics and the insurance sector

The insurance sector is an important provider of old-age security solutions and a key supporting element of the construction of a modern welfare state. The Four Pillars Research Programme is not only relevant to the public side of the debate but also the insurance sector in six main areas, as follows:
1. Global partnership between the public and private sectors
The current need for reforming social security has been felt in all countries. The main objective of this reform has been to reduce the hitherto substantial share of the GDP devoted to social expenditure. The key challenge here has been to consolidate the partnership between the public and private sectors. Almost all States have had to redesign or readjust their Welfare policies on health and pensions so as to avoid creating public deficits which would otherwise place too great a burden upon future generations.
2. Development of second and third pillar pensions
With recent and current reforms of public pensions aimed at future sustainability — involving inevitably a fall in the relative level of old-age benefits — the development of second and third pillar pensions has become a priority. In many countries, second pillar pensions have been made compulsory and, where not already compulsory, have been encouraged by all kinds of financial and fiscal incentives. Private pension funds will play a growing role in securing future retirement income.
3. Promotion of an extension of working life, i.e. of a fourth pillar
However, it must be understood that even substantial development of second and third pillar pensions will probably not be sufficient to compensate both longer life-expectancy and a rising proportion of people over 65 years. With good health expectancy it is not only possible but also essential to plan for flexible extension of working life. Pension funds must encourage and facilitate this extension which will also benefit the insurance sector workforce.
4. Encouragement of global savings and life insurance
In a more general way, it is essential to encourage long-term savings for retirement and longer life expectancy. Insurance companies have a key role in designing adequate and tailored products to cater to a wide range of needs and means.
5. Age management of the workforce of insurance companies
In insurance, as in other sectors of the economy, workforce ageing will require planning for improved age management as a matter of urgency. Our studies at the European and international levels have shown that, among other things, continuing training, worktime reduction, job redesign and a review of the seniority-pay principle, will need increasingly to be addressed by individual insurance companies. Codes of employment might be an ideal place to start in developing new age management strategies.
6. Debate and communication
Developing multi-pillar pension systems and promoting an extension of occupational life depend on certain conditions being met and will need to be preceded by a coherent, broad-based, informed and on-going debate of all these issues. With our research programme and its fourth-pillar proposals we have been able to do pioneer work in this field and have, we believe, made a significant contribution to this all-important debate.

12. Coming to terms with the old-age dependency ratio

The burden that projected increasing old-age dependency ratios will place upon societies where an increasingly smaller proportion of the working-age population will have to generate the goods and services to be consumed by retirees (if exogenous factors are discounted) is all too real. We only need to look at the widely available tables on forecasts of the old-age dependency ratios in most developed countries to get some idea of the magnitude of this issue. And things might get even worse since, according to some experts, several developed countries may be underestimating the fiscal and economic consequences of population ageing because their official population projections assume, perhaps wrongly, that adverse trends in longevity and fertility will substantially reverse.
However, while the trends described above are undoubtedly correct, they convey the wrong idea. What they seem to indicate is that our societies are ageing. But what they really tell us is that the share of the people in a given age-group is increasing relative to that of other groups in the population. This is a rather different thing.
Most often than not, saying that our society is ageing creates a misconception in people’s minds. As long as we merely mean that most people today achieve an older age than they expected to several decades ago, then the statement is acceptable. But in itself, the expression ‘ageing society’ is somewhat inappropriate. We must first recognize that there has been an increase in the length of the life cycle. Second, it must be observed that what is really becoming older is the notion of age itself. We only need to read the European literature of the XIX century to learn what it was like to be 50 years of age. It is obvious that the onset of physical and mental decline has been pushed back far later than was hitherto the case. In other words, at 50, 60 or 70 years of age, we are much younger today than we would have been at those ages in the not-so-distant past. Therefore our societies are in a sense getting younger, because we live longer and better5. This phenomenon concerns the majority of countries around the world.
Part of the problem of this misperception of age and ageing in general lies in the fact that we are accustomed to counting forward. However we should use those parameters that are best suited to our problem. Counting forward the time that has elapsed since a person’s birth in order to determine their future behaviour and, most importantly, their future investment decisions, is not particularly useful nor likely to produce the best results. Investment theory dictates that one discount future (sic!) cash flows to determine today’s (net present) value. Why then do we assume, in the case of populations, that their behaviour is primarily dictated by how much time has passed rather than by how much time is left to them?
To pursue this argument further, we have to analyze ‘investment age’ in our societies in terms of how much time a person or a given group of people will have to profit from their investment decisions. This ‘investment age’ corresponds to remaining life expectancy. According to this approach, ‘investment age’ would be measured as the difference between the current date and a prospective, statistical (and of course uncertain) date when the body of the person would cease to function. If we take the example of a statistically average female and male in Germany today, at age 60, they would have a time span of respectively 22.85 and 18.48 years left to enjoy life. This corresponds to their investment horizon, if we discount alternate motives like bequests, etc.
In order to understand how young or old our societies are, we have to put this ‘investment age’ of 22.85 and 18.48 years into an historic perspective. Only by calculating the ages during the past century or so at which an average German woman and man would have the same ‘investment age’, i.e. the years (22.85 and 18.48) remaining left to them according to actuarial life tables, we then can truly determine how old we are. The result is: we are young. The age of 60 years today corresponds to the late 40s about 100 years ago. That is only four generations back.
Economists have had and are still having a hard time understanding why the ‘elderly’ are not behaving as they should. They are deemed to be neither as risk-averse as they should be nor are they dissaving as much as they ought to. Part of the reason for the perceived irrationality is linked to a very rational understanding of their own position in a society that is young longer — despite increasing chronological age indications — and characterized more by changing risk distribution over the life cycle than by age-correlated risk-aversion.
We are just beginning to understand how best to organize pension systems that take fully into consideration not only the above but also other important developments like lower fertility rates, a shift of risk-bearing from the state and other group entities towards the individuum etc. Few questions are as relevant for individuals as also for the states and the economic environment individuals live in, as the issue of how to organize income throughout the life cycle. The Geneva Association has been researching this topic since almost its foundation over 30 years ago, and continues this work through its Four Pillars Research Programme.
Only an efficient, inter- and intra-generationally fair, and sustainable system for providing old-age income has a future, provided it take full advantage of the specific benefits offered by the different players — state, employers, insurance, and individuals — as well as by the various mechanisms — pay-as-you-go and capital funding — and organizational structures — 1st, 2nd, 3rd and 4th (part-time work after 60/65) pillars. The challenge will be with us for our life-time and well beyond.

5 For more detailed discussions of this issue refer to the work of The Geneva Association’s Research Programme on Health and Ageing headed by Dr. Christophe Courbage (

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