Technological Changes, the Reversal of Age Pyramids and the Future of Retirement Systems

5.1 The Future Retirement System

In this essay we have reviewed a large variety of new macro and micro economic factors that must be considered in the designing of retirement systems in a modern, post-industrial economy. For the sake of clarity it is important to summarise some of the most important points again.
• The rapidly changing environment and the continuous acceleration of the changes. This introduces a high level of risk at both the national and individual levels.
• The rapidly changing family patterns. The increasing importance of single-parent families, the rising divorce rates, the high chance that many people will have more than one marriage in their life time, etc., invoke a need for individual plans, and less reliance on spouses in the design of the retirement plan.
• Rapidly changing employment patterns. The retirement systems must be flexible, to allow great mobility between industries, companies, cities, and countries, as people will typically change their employment (and even their profession) several times during their lifetime. Employment becomes more challenging: better opportunities, but large risks and instability. New industries rise and fall quickly due to rapid technological changes, and due to strong worldwide competition, part of which is the result of the currently big gaps between income levels in most advanced and less developed countries.
• The growth of the so called ‘service economy’ based on sophisticated communication and computers, enables the creation of very sophisticated financial instruments which offer a large variety of retirement instruments, which are catered to the individual’s desires and needs.
• Unions have significantly less power than in the past, and therefore, they cannot offer good pension systems. In our opinion their time is over. Unlike Blackburn (2002), we do not believe that with the present nature of employment, the union plans have a real chance of revival, and we surely do not see a way in which labour will use these funds as leverage to take control over the economy.
• A growing proportion of females joining the work force, and competing on the declining number of jobs.
• It cannot be taken for granted anymore that every person will be employed continuously throughout the common working period (say, 18-65). The chances are that many people will be unemployed during relatively long periods, which means that countries will have to find ways to assure that unemployed people still have the means to provide for their daily pre-retirement and post-retirement needs. There must be a safety net for these people, and it should be run by the government.
• The design of safety nets for unemployed people (which will take care of the post-retirement period as well) is a very complicated task. There are real problems of building the right criteria and incentives and preventing fraud, the main problem being that high unemployment rates may become an integral part of the post-industrial society, rather than a transient problem.
• Rapidly increasing life expectancies are causing a drastic change in the ratio of the lengths of the period while employed to the post-retirement period, which increases the financial burden of a retirement plan. Assuming a zero real interest rate means that people should save continuously between a quarter and one third of their current income in order to be able to maintain a similar standard of living in the post-retirement period. The burden decreases if saving is done at a higher interest rate, and for a long duration. Unfortunately, it seems that there are limits to growth, and there are no grounds to expect significantly higher real interest rates in the future.
• The higher life expectancies make many people capable of and willing to continue working beyond the common retirement age. This trend conflicts with the need to find employment for the young people joining the labour force. Currently this conflict ends up in a situation where the 50 year-old person who loses a job finds it quite difficult to get a new one.
• The increased longevity increases the financial burden of retirement. The burden can be eased by spreading it over a long saving period, enabling the interest compounding process to help build substantially larger savings. Unfortunately, young people typically start thinking about retirement benefits only at an advanced age that leaves only a short saving period. As educating people takes too long and is too slow a process, there is a need for some kind of mandatory saving arrangement.
• A high interest rate is an important factor in easing the financial burden of retirement. Interest rates are determined by a complicated process relating to the country’s internal parameters (such as the population age structure, growth, the demand and supply for savings, inflation, etc.), as well as worldwide external factors. Due to the open world markets and the interest parity theorems, the real interest rates of the entire world are interconnected and high real interest rates can be reached only if the entire world economy is growing fast. However, global limits to growth make it unreasonable to expect a continuous and prolonged period of growth.
• Deferment of the retirement age is not solving the retirement problems. It actually increases the conflict between employment to young and to older people, and may further aggravate the situation of people who lose their job prior to retirement. Their chances of finding a new job are slim, and they have to wait longer before they get retirement benefits from the current social security systems.
• The higher longevity is accompanied by significant health costs. Age-related diseases that were barely significant in ancient times are becoming quite relevant to a large number of retired people. A significant part of the retirement period may be spent in relatively poor health and require substantial financial resources. The treatment is often extremely expensive, with a marked trend in the direction of further rapid cost increases. This is a huge financial problem that will probably consume a substantial part of the GNP in the near future. The best solution is probably through pre-emptive treatment at an early stage, before the real problem blows up in our face.
• Countries starting the industrial revolution experience a rapid population increase. This may influence their size ranking, and may affect their world political power, but it is accompanied by the need to feed, educate and find employment for the growing population.
• Population pyramids are changing drastically. Countries starting the industrial revolution have a baby boom that at first generates a rapid increase in the population, and after 15 years is responsible for a significant increase in the labour force (and the consuming society). This baby boom turns into a geriatric boom some 60-70 years later, the increase in the number of aged people being very drastic in comparison to total population growth during the same period. A combination of factors produces this effect: the increased life expectancy and the sharp increase in the number of people surviving the retirement age.
• The changing population pyramids result in changes in dependency ratios. At the beginning of the industrialisation process there is a growing need for education for the baby boomers. There is an improvement of dependency ratios15-20 years later, but 60 years after the boom the dependency ratio tends to deteriorate. There is a need to turn schools into retirement homes…
• There are changes in the perception of people and their desires. The post-industrial person is more individualistic and cherishes personal freedom. The society as a whole is more democratic, but political parties lose their power. The leaders are often focused on narrow targets, and lack the power to lead big changes and revolutions.
• People in the post-industrial world believe in privatisation. They expect governments to intervene in the economy as little as possible, serving mainly to regulate the free operation of markets in a transparent and honest way, and to take care of defense and some educational issues. However, at present this is still in the realm of utopia.
• When other countries are not playing by the same rules, governments have to interfere, since the name of the game in such an environment is to improve the terms of trade of your country against the others (for example, if some countries do not protect the intellectual property of others, they may achieve economic advantages over the others). Not doing so, your country is at the risk of ‘importing unemployment’ from competing countries. In other words, as long as there are no uniform and agreed international rules, there is a strong competition between countries.
• Asymmetric behavior, even in areas that seem to be unconnected — such as the retirement system in the country — may affect the economy and world competition. For example, if a country that does not care about retirement risks, and defers the treatment of the problem to the next generations, this may drastically affect the level of wages, and may give that country a competitive advantage over other countries, at least in the short term.
• The fact that currently not all countries in the world are at the same level of development, and that the economies are not run by the same rules, creates enormous risks to the world’s economy. It may cause a lot of tension between countries, cultures and civilisations. It may create envy and hostility between the ‘haves’ and the ‘have not’. It may create problems when frustrated, unemployed and starving people in one area are prevented from immigrating to another country; in some cases this may develop into real violence, between countries, cultures and economies. The world is getting smaller and more interconnected, and therefore also extremely fragile and vulnerable. Any inequality — even in what may seem as a remote and unrelated area such as the retirement system — may be the cause of a big problem.

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