Autumn 2007
Across the developed world, the demographic profile is changing. According to United Nations projections, the proportion of the global population over 65 years old will triple between now and 2100, from 7 percent to 21 percent. The population is aging more rapidly in some countries, such as Italy and Japan, and less rapidly in others, such as the United States and the United Kingdom. But in all countries, this demographic shift raises challenging new questions, not just for retirement and how it is to be financed, but also for the world of work — and the transition between the two.
Although most people understand that this change is taking place, they do not realize how large it will be and what its implications are for our working lives, for how we provide in advance for retirement, and for how support and care will be provided and funded in the future.
Regrettably, we are also prisoners of a number of assumptions that, if they were ever correct, will no longer hold in a changed world.
Assumption 1: We’ll work long enough to pay for our retirement. Not necessarily. There has been a dramatic change in the ratio of years spent at work to those spent in retirement. We will have moved by 2050 from five years of work for each year of retirement to 1.7 years of work per year of retirement.
Assumption 2: As our society gets richer, we can afford to retire earlier. The basic flaw in this is that people are not taking into account increasing longevity and its associated higher costs. We may be wealthier, but retirement is more expensive. For example, for people in the last 10 to 15 years of life, not only do health-care costs rise significantly, but new expenses are incurred for services they can no longer perform themselves, such as home repairs or landscaping.
Assumption 3: It is useful to retire people early, because there are not enough jobs for everyone. The belief that older workers must be displaced to free up jobs for younger ones was bad economics in the 1980s, and it is even more misguided now. Increased output generates more income and expenditure, and thus creates more jobs. The consequences of this “lump of labor” fallacy are serious: It fosters an ageist agenda in the workplace. Laying off workers over age 50 or forcing them to retire results in a loss of skills and intellectual capital. It also accelerates the drain on public and private pension funds.
Assumption 4: Income and status at work rise linearly, and people retire at their most senior position. In some countries, employment regulations make it difficult to continue working once you reach the age of retirement or have officially retired from the organization. Perpetuating this approach reduces organizational flexibility and promotes ageism.
Assumption 5: We accumulate assets while working and spend them during retirement. People tend to invest in equities when younger, then shift toward annuities and other fixed-income instruments as they age. Yet we cannot afford to stop growing our income base too soon. Some of the money we are not drawing on in the early years of retirement still needs to be invested in growth-oriented funds or stocks, particularly if the size of our pension pot at retirement is not adequate.
Assumption 6: During retirement we won’t change residences more than once. The home we live in when we retire may be great for fit, car-driving 60-year-olds, but could become unsuitable later. Consequently, many older people continue to live in houses that are too big, are too expensive to maintain, and may pose hazards to them.
Assumption 7: The state will provide social and health-care services for us in our later years, allowing our children to inherit a significant portion of our estate. The shift in demographic ratios will make public social and health-care services extremely expensive. By 2050, the U.S. will have 2.6 people of working age for each person over 65. As a result, governments will be forced to reduce their commitments by insisting on the use of personal assets to pay for care before help from taxpayers is invoked.
As we have seen, many of the individual and collective assumptions about work and retirement are no longer valid. We must recognize that long lives are no longer unusual and plan for such a future.
For the individual, that means saving more and not fully counting on state care, corporate pensions, or inheriting a parent’s estate in its entirety. We also must be prepared to work longer, to keep learning, and to be flexible.
For this to occur, however, organizations must change as well. Leadership models need to be reconfigured so that management responsibilities can be transferred to younger staff. New advisory or client-facing roles could be created for senior managers so firms can continue to benefit from older employees’ experience and judgment after those individuals have handed over the reins.
Addressing the issue of our aging population is a matter for society as a whole. We need to remove restrictions on how pensions are drawn and provide retirement-financing products better suited to the longer lives of the elderly.
Changes are already afoot. Retirement and pension ages in many Organisation for Economic Co-operation and Development (OECD) countries are starting to increase. Restricting compulsory retirement will foster — or force — changes in work culture and minimize ageism.
But the bigger question remains: Are we prepared to live with the new assumptions that this demographic shift will require of us?
Lord Andrew Turnbull (turnbull_andrew@bah.com) is a senior advisor to Booz Allen Hamilton based in London. Between 2002 and 2005, he was secretary of the Cabinet and head of the Home Civil Service in the United Kingdom.
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