The Challenge of Increasing Life Spans for Employment and Pension Schemes: An Open Letter to All Those Who Are, or Will Be, 65

A life expectancy of 20 years at 60

There is one point we need to clarify straightaway. There has clearly been a tremendous improvement in the life expectancy of the population particularly as a result of an enormous fall in infant mortality. Some people assert that this is the main reason for current demographic developments.
There is, however, another statistic we need to consider if we are to fully appreciate the significance of this growth in length of life. And that statistic has to do with life expectancy at 60 and 65 years. The latter currently varies between 15 and 20 years in industrialized countries, with most of the other countries beginning to catch up. This means that countries which are ‘young’ today, with the bulk of their population less than 20 years old, will be facing enormous ‘ageing’ problems in 20 to 30 years’ time. China, for instance, has already had to think about the issue. So that what the ‘older’ countries manage to achieve today in terms of solutions could serve as a valuable benchmark for all those other countries tomorrow. In this respect, industrialized countries have no more than a head start.
Nor should one forget that, regarding life expectancy at 60 and 65 years, there is a big difference between men and women with, in many countries, women living four or five years longer — another thing that needs to be thought about carefully.
Finally, our statistics need to be refined to give a clearer picture of the effective levels of autonomy, health, training (especially updated training) and informal activities of 60- to 65-year-olds.
All of this involves a range of economic and financial measures and initiatives affecting the structure of training and the nature of occupational and leisure activities we pursue.

Optimizing the first three pillars of retirement

First, let us take a look at the financial situation of 60- to 65-year-olds. We shall start with what in most countries is the basis of most people’s pension, albeit with significant variations.
To begin with, we have what is called the first pillar that in some countries accounts for the main part of a person’s pension whether the latter begins at 65 or 60 years (the time of entitlement varies considerably from one country to the next). This first pillar is based on the pay-as-you-go principle: monies are collected from a levy on wages by the state that, often out of necessity, adds extra financial resources derived from other kinds of tax. Such monies are then disbursed to those entitled to a pension (that is, you and me, who are also tax-payers) as and when our pensions are drawn. The idea behind this first pillar is to provide ‘retirees’ with a minimum income, which in some countries is subject to a maximum amount per couple; in Switzerland, for example, this ceiling is around 7 2000. This means that in the case of the highest earners this pillar functions as a channel for wealth redistribution. The main problem with this system, however, is that if the number of those in work diminishes in proportion to the number of those drawing a pension, then taxes have to be increased to make up the difference and we are all affected.
In my native town of Trieste, the press recently reported that the number of retirees has just drawn level with those in work (who, in theory at least, must pay from their wages for the pensions of those no longer working). But, think about it for a moment, such a system, if acquired entitlements are defended at all costs, is bound to run into trouble, i.e., bankruptcy, with inflation either directly or indirectly causing a drastic reduction in pensions. And, as the more senior members of the community, should we not feel a little ashamed at having to rely to such an extent on the wages and earnings of the younger members? After all, I have always maintained that we should think of the generations to come and secure a better future for them. And just what sort of future is that going to be if they have to work harder to keep us retirees afloat? Beyond a certain point, indeed, intergenerational solidarity begins to be affected and the need not to discourage youngsters from working becomes paramount.
Let us, then, by all means preserve the first pillar, which will always remain the mainstay of our social welfare system, but let us, at the same time, be careful not to allow our short-term concerns to destroy it. I, for one, will be concerned to preserve part of my financial resources in the form of a first pillar that is both realistic and sustainable over the medium and long term.
Let us now take a look at another financial resource available to those aged 65 and over: the second pillar. This is essentially a system based on funding and it takes a number of different forms, mostly linked to employment. It is also often called the supplementary system. It involves collective (either directly or indirectly) savings, which provide an income on retirement according to calculations of probable survival. This means that with the same capital amount, if I start drawing my pension later, I can expect a higher income. The main snag with this second pillar, however, is inflation: if at 65 years I draw 7 1000 per month, with a rate of inflation of only 2 per cent per annum, by the time I am 75 I will have lost around one-quarter of my purchasing power. And with an average inflation rate of 3 to 4 per cent per annum, my 7 1000 will have lost half its value.
Now let us suppose that I live on for 20 years after retirement. In that case, over time, my second pillar is not going to amount to much; and this is why control of inflation is such a crucial issue. One could, of course, look to one’s return on capital to offset the impact of inflation, but that merely introduces a second element of uncertainty.
Funds must be really accumulated and protected. We must be sure that we do not fall into the ‘Enron trap’.
Things, of course, would be rather different if the return on capital was expressed in terms of its ‘real’ rather than ‘nominal’ value. But even so, there are many investors and economists who maintain that a little inflation, ‘to oil the works’, is no bad thing. After all, it helps investors and risk-takers to pay off part of their debt.
The third pillar is made up of any savings, liquid and fixed assets we may have individually set aside for a number of reasons, often, where circumstances permit, as a supplement to our pension.
So we find ourselves at the age of 65, or about to enter retirement, with three pillars with which we try to make ends meet as best we can. In the absence of any ideal solution or recipe, we will probably find it advisable to spread our risk across the three pillars and so optimize our income and minimize the risk of any unpleasant surprises.
But think for a moment. If we lived in the 19th century, at the time of Bismarck, for example, when the age of retirement was used to calculate the average age of mortality, there would be no real problem. But do we really wish to say goodbye to all those magnificent opportunities for living that, in spite of all else, the industrial revolution has bestowed upon us? At 65 years, we have before us, at least most of us do, the possibility of living until 80 in relatively good health: a period of time extensive enough to make us think long and hard about the soundness and strength of our three pillars.
Despite an almost universal aspiration to get into retirement as quickly as possible, the statistics show that leaving the workplace results in a sudden rise in the number of suicides, in health costs, and in the incidence of major family problems and of various other kinds of upheaval. We thought we were entering paradise only to find ourselves moving into a world of decline and disappointment. Those who survive the experience are precisely those with a marked capacity and desire for productive activity. Even the ravages of Alzheimer’s disease seem to be less devastating for those who remain active. So let us prevent our dreams from turning into nightmares from which we cannot escape.
The real challenge, then, that faces us when we enter retirement, is that of remaining active: not only in the shape of preserving our good health but also in terms of adding a fourth pillar to the three we already have. The aim of this open letter is precisely to trigger an in-depth discussion of this fourth pillar: something which I, for one, intend to continue to build on until I am at least 80.

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