Reinventing Retirement - AARP · IN THIS ISSUE Reinventing Retirement 1 > From the CEO Reinventing...

Special Issue 2004

Reinventing RetirementI N T H I S I S S U E

11 >>>> From the CEOReinventing Retirement

33 >>>> From the EditorThe Dialogue

44 >>>> Guest ContributorThe Ages of Optimism

66 >>>> Beefed Up Pensions?International Trendsin Social Security

88 >>>> This is Not YourFather’s Retirement

1100 >>>> Another HomelandSecurity: Strategiesfor ProtectingPensions

1122 >>>> Re-toolingRetirement’s Tools

1144 >>>> Fear Factor:The Shift of RetirementRisk to the Individualin the U.S.

1166 >>>> Defined BenefitPlans—Still a Good Idea?

1188 >>>> AGEing in Europe:Realizing andPromoting theContributions ofOlder People

2200 >>>> Early Retirement:Disease of theEuropean Continent?

2222 >>>> Global Aging Focus onPension Income

2288 >>>> What the Leaders are Saying

Demographers tell us that by2050, older people will out-number children for the firsttime in history. The babyboomer generation in theU.S. for example, will startturning 60 as soon as 2006.This seismic demographic shift that we call Global Agingis changing economic, socialand political assumptionsacross the developed world. It is also redefining the tradi-tional concept of retirement.

What will retirement look like in this brave new worldof longer life expectancy, low immigration, and lowbirthrates? For some people,it may mean workinglonger—either because they are healthy and enjoy

the satisfaction of work orbecause they need to forfinancial reasons. But regard-less of the reason, govern-ment, employers and evenemployees will have to adaptto this shift in the workforce,removing obstacles to employ-ment for older people.

“Retirement” in an olderworld will also mean morepeople needing more healthcare and pension benefits forlonger periods of time thanever before. These twin chal-lenges will test nearly everyaspect of our societies—politics, economics, housing,transportation and medicine—and will require our collectiveattention to meet.

“Retirement” in a world wherethe old outnumber the youngwill also mean more volunteersand mentors in our society,promoting civic commitmentand generational cohesion.

AARP, in conjunction with theFinancial Times, will examinethe changing landscape ofretirement by convening an international forum ofexperts—policymakers, business and labor leaders,academics and the NGO community—for a major conference in London inNovember, entitled ReinventingRetirement: Strategies for An Aging World. We areexamining the situation froma “global” view, focusing

F R O M T H E C E O

(Continued on page 2)

In Germany—where according to the Federal HealthMinistry more than 50 percent of companies do not haveemployees above age 55—the majority of respondentsdo not think their country is prepared to deal with anolder workforce or employees working beyond the traditional retirement age.

To compensate for an impending labor shortage, the majorityof German respondents think that the country will adoptless restrictive immigration policies.

The research provides several crucial insights. For one, whilethe phenomenon of aging is almost universally recognized,there is little impetus to make needed changes in our societies now. The research demonstrates that in the end,retirement is more than numbers and math, it is also a testof our vision and leadership. Aging presents opportunity as well as challenge, which we can harness to our benefitor ignore at our peril. But it must begin with a broad consultation across our societies and even our countries. A constructive dialogue engaging the widest spectrum ofstakeholders is necessary, and I’m glad we were able to convene so many voices in this issue of Global Report onAging. We look forward to continuing the dialogue thisNovember in London when we convene our forum onReinventing Retirement: Strategies for An Aging World.

William D. Novelli,Executive Director and CEO, AARP

Bill Novelli is CEO of AARP, a membership organization ofover 35 million people age 50 and older, half of whomremain actively employed.

F R O M T H E C E O

Reinventing Retirement (Continued from page 1)

AUSTRALIA

80.479.879.8

78.7

77.1

79.7

81.9

78.679.6

80.4

78.277.3

CANADA FRANCE GERMANY IRELAND ITALY JAPAN NETHERLANDS SPAIN SWEDEN UNITEDKINGDOM

UNITEDSTATES

22 >>>> Global Report On Aging: Special Issue 2004

*At birth in 2002. Source: World Health Organization (WHO). “World Health Report 2004: Changing History (Annex 1).” Geneva: WHO, 2004.

on the economic aspects, such as pensions and employment,underscoring how the implicationsof aging and the actions taken inone country can greatly affect thesituation in others due to linkagesin the global economy, and high-lighting the “best practices”undertaken in some countriesfrom which we all can learn.

A major new international survey, sponsored by AARP andconducted by Wirthlin Worldwide, will also be released atthe conference. We asked leading policymakers and opinion-leaders their thoughts on the impact of aging on theircountries and on the world. Their answers are instructive intelling us more about what retirement will mean in an agingworld and in devising strategies to address this new reality.For example:

While an overwhelming majority of Japanese think theircountry will be greatly affected by an aging population(i.e., through labor shortages), they believe Japan isunprepared to deal with the potential changes that may result from this aging of the population.

U.S. and Canadian respondents think that their countriesare somewhat well-prepared for a future workforce comprised of more older workers and employees workingbeyond traditional retirement age. They point to thepotential of practices, such as flexible work schedules,that help in full-time employees transition into retirement,as well as other practices that contribute to the trend ofemployees continuing to work beyond retirement age.

When it comes to labor shortages, the majority ofCanadians and U.S. respondents think that their coun-tries are very or somewhat likely to experience a laborshortage in the next 20 years.

Global Report On Aging: Special Issue 2004 >>>> 33

The Dialogue

F R O M T H E E D I T O R

One of the reasons AARP launchedthe Global Aging Program overthree years ago was in responseto the lack of dialogue concern-ing the positive implications ofthe aging populations. We recog-nized that cooperation regardinghow to address the aging worldwas very fragmented and lackedinput from all stakeholders. Theabsence of wider cooperation

often led to public outcry when governments attempted toreform pensions or introduce new health care legislation.News outlets, with their focus on negative scenariosof economies going broke trying to account for their growing number of retirees, onlyreinforced this doom-and-gloom rhetoric,excluding the fact that older people repre-sent a very valuable resource, namely aproductive and purchasing power thathas yet to be truly tapped.

With that outlook in mind, our CEOWilliam Novelli and other members ofAARP’s executive team, began a series of wide-ranging discussions with opinion-leaders in countries all over the developedworld. We engaged policymakers and the business and NGO communities in these dialoguesabout how their respective countries are dealing with theiraging populations. We learned a great deal from sharingour experiences and best practices. For example, we havebeen able to assist some European Union countries withtheir efforts to introduce age discrimination laws that theyare mandated to implement before October 2006, and thatthe United States has had since 1967. On another hand, wehave learned from other countries about effective policyapproaches that could benefit the United States. For exam-ple, in the Netherlands the consumer-directed approach hasproven much success in areas such as long-term care.

This special edition of our Global Report on Aging, coincideswith the Reinventing Retirement: Strategies for an AgingWorld conference we are holding this November in Londonin association with the Financial Times. For this special con-ference issue, we have invited several opinion-leaders toshare their views on a wide variety of topics, but all relatingto the concept of retirement, in the hope that readers willbenefit from such broad perspective.

In this issue, we will read divergent viewpoints from a vari-ety of contributors, each of whom is engaged in the subjectmatter that they write on as a stakeholder and not merelyas an observer. For instance, in the essay by Bert Rürup thehead of German Social Security Reform Commission, he discusses which pension reforms are necessary in the con-text of an aging world. Mr. Rürup will be presenting hisCommission findings to the German government inNovember. Anna Rappaport of the U.S. posits the value ofdefined contribution pension plans. Her conclusions differfrom those of Jan Nijssen, in charge of global pension forING, an international financial services firm headquartered

in the Netherlands. He discusses occupational pensionsand public pensions from the corporate perspec-

tive. Nicholas Timmins of the Financial Timesexplains how adequate social and health

care can effect the economic affect of anaging society. Dallas Salisbury, Presidentand CEO of the Employee BenefitResearch Institute, focuses on overalltrends in occupational pensions andchallenges to those trends. Our discus-sion would not be complete withoutthe voice of labor, represented by

Kenneth Georgetti, President of theCanadian Labour Congress, who shares

his perspective on employment for olderworkers and that of Anne-Sophie Parent who

works on these issues at the NGO, AGE: TheEuropean Older People’s Platform.

I hope the views expressed in this Global Report on Aging willhelp ignite a broader conversation regarding what strategiesare available for an aging world. The future publications ofthe report should continue to serve as useful and informativediscussion forums and resources for policymakers, researchers,business leaders, media, and all others interested in the issuesof global aging.

Ladan ManteghiDirector, AARP International Affairs

Ladan Manteghi serves as Director of International Affairs at AARP.


G U E S T C O N T R I B U T O R

The Ages of Optimism:There is No Need to Fear the So-called Demographic Time-bomb,As Long as Good Provision for Social Care Is in the Pipeline.By Nicholas Timmins, Public Policy Editor, Financial Times

Life expectancy is on the increase. Ithas been for decades, but for decadesactuaries—tending to count conserva-tively and reluctant to believe that thegains made in the 1980s and 1990swere going to continue—have beenrunning to catch up.

Just how fast they have to go hasbeen shown by the recent upwardadjustment made by the British gov-ernment actuary whose latest projec-tions have added between 10 and 13

percent to life expectancy for those intheir 60s and 80s compared with thefigures being used just two years ago.

Slowly but surely the implications ofthis are becoming discernible for pen-sions, working lives and health carecosts. But there is one area wherehuge uncertainties remain—the costsof social care.

Longer lives have big implications forpensions and work. Combine longerlife with longer education—more people taking degrees, indeed morepeople taking second degrees before

they start serious earning—and theequation that pitched normal retire-ment at about 65 is one that can nolonger hold.

The days when people worked for 40or even 50 years to fund a retirementthat might last 10 years are beingreplaced by an equation where, atmost, they will work 40 years to funda retirement that may last 20 or even30 years if they go at 65—and thatignores the marked trend in the UK in

recent decades for early retirement,both voluntary and involuntary.

As Adair Turner, Chairman of theBritish government’s PensionCommission has been arguing, if pensioners are not to be poorer in old age, or if future workers are notto give up much more consumptionto fund other people’s old age, theaverage working life is going to be longer. There is an inevitabilityabout it.

How much longer remains open toquestion, as does what sort of work.

Will it be full-time, part-time or anotherform, such as flexi-working?

There is room for a lot of debate abouthow companies and employees aregoing to adjust to a world that asksbig questions about when careerspeak, and how older workers canremain engaged and productive. In a world where people’s last job may not be their most senior, final-salarypensions may have to become career-average ones so that people can moreeasily downsize their jobs as they near retirement without downsizingtheir pensions.

The implications for health care costsare also becoming clearer—and theyare far from disheartening. Fromaround the world—specifically theU.S., the UK, Germany and theNetherlands—the evidence is mountingthat by and large people are not onlyliving longer but are also healthier.

Driven partly by healthier lifestyles,which makes it possible for people to work longer, and partly by fewercrippling manual jobs, disability rates in old age have been falling.

Far more is spent on health care forthe elderly than for other groups:those aged over 85 consume ten timesmore National Health Service (NHS)resources per head than those agedfive to 44. But much of this appears to be the cost of dying—the greatestexpenditure comes in the last monthsof life as treatment is given to whatprove to be untreatable conditions,and the heaviest expenditure comes

…if pensioners are not to be poorer in old age, or iffuture workers are not to give up much more con-sumption to fund other people’s old age, the averageworking life is going to be longer.


regardless of whether people die intheir 60s or their 90s.

Indeed, there is some evidence fromthe U.S. that “the cost of dying” islower for the very old than for themerely elderly, possibly becauseevents such as strokes that couldleave a 70-year-old crippled for yearsare more lethal when they happen in very old age.

In other words, an aging population,with many more people living intotheir 80s and 90s, will add to healthcare costs but not prohibitively. Thereis no reason to fear the “demographictime-bomb” on those grounds.

There is an important qualifier here.The studies that point to these con-clusions have all looked at acutehealth care costs—the cost of med-ical interventions.

What is much less clear is the impacton social care provision: the cost ofproviding lower-level help with shop-ping, feeding, bathing and other normal activities of daily life wherepeople may suffer disabilities that arenot expensive in health care termsbut need support—from help athome to sheltered accommodation. Ifthis kind of support is absent, acutehealth care costs may result.

But here there are fewer good dataon which to base a judgment. It was an issue that Derek Wanlesslooked at in his report on healthspending, commissioned by the government, that provided the justification for the government’shuge investment in the NHS.

No review of health care resourcescould be complete, he said, withoutconsidering the link between healthand social care—but the data werelacking to make sensible projections.

He called for an immediate study ofthe likely trends. That was two yearsago, and nothing has happened since.

It is work that needs to be donebefore we can be sure that we canlove the bomb—the demographic onethat is giving us longer and healthier

lives—rather than fear it for the coststhat it will bring.

Nicholas Timmins has been public policyeditor of the Financial Times since late1996.

G U E S T C O N T R I B U T O R

Aging is a global phenomenon. Though having occupied aprominent role on the agenda in industrialized countries forsome time, it is often overlooked that in a few decades, themajority of the world’s older populations will live in developingcountries.

Providing income security to older persons in aging societiesis a challenge perceived very differently in industrialized anddeveloping countries. In the former, the debate has mostlybeen about how to make public pension programs finan-cially sustainable in the long term. In the latter, efforts havefocused on creating some form of even basic protection forolder persons.

It is often assumed that countries throughout the worldhave established comprehensive retirement income pro-grams to fight poverty among the elderly. The real situationis, however, very different. The vast majority of the world’s

population is either without or has only inadequate accessto social security protection. In most countries, the creationand extension of social security programs must therefore haveabsolute priority. This is not only a moral obligation. It is alsoan economic necessity. A recent study of the InternationalSocial Security Association (ISSA) has for instance shownthat social security provides the foundation for social devel-opment, which is indispensable for economic developmentand steady economic growth.

But coverage is not only an issue for developing countries.The coverage gap has widened in industrialized countries

too. Globally, the growth in atypical employment and themushrooming of the informal economy are major factorsaccountable for this development.

Bridging the coverage gap is a major concern for the ISSA.We are constantly working with policymakers and socialsecurity institutions around the world in order to reduce, as rapidly and as extensively as possible, the number ofolder persons living without an adequate income.

Where more or less mature social security systems exist,recent reforms have focused on ensuring that these systemswill be financially sustainable in the long run. Discussionshave been mostly concerned with contribution rates, funding levels, benefit formulas and whether retirementincome should be provided by one, two or even more pillars of old-age security. Countries have curtailed benefits,encouraged or mandated complementary privately managedschemes, and have put more and more responsibility on the shoulders of individuals.

Positively, many of these reforms have proven that socialsecurity can adapt to changing social and economic circum-stances, and that scenarios of financially unsustainable orbankrupt schemes are overly simplistic and unfounded.Negatively, reforms in some countries have substantiallydecreased the level of protection provided to individuals and have exposed individuals to considerable financial andother risks.

After more than a decade of pension reform, it is nowbecoming increasingly clear that adequacy of pension benefits has been neglected in the pursuit of financial sustainability. Predictions of income replacement rates ofretirement income systems in industrialized countries clearlyshow that pension schemes will, in many cases, not providean adequate retirement income to retirees, and we maythus be facing the challenge of avoiding a steep increase in poverty among older people in the future.

We have reached a point where it is essential to move thedebate beyond the narrow view on the technical parame-


Beefed Up Pensions? International Trends in Social SecurityBy Dalmer Hoskins, Secretary General, International Social Security Association (ISSA)

Providing income security to older persons in aging societies is a challengeperceived very differently in industrializedand developing countries.

ters of pension schemes. A wider consideration is neededof the social and economic factors influencing whether wewill be able to build financially sustainable and adequatepension schemes for the future. The basic challenge of ashrinking working population having to support a growingnumber of economically inactive persons is well document-ed. In order to cope with this challenge, however, socialpolicies must shift from reactively rewarding inactivity toproactively encouraging activity. Policymakers around theworld are now realizing that employment and labor forceparticipation carry the key to financing adequate pensionbenefits in the future.


Action to promote employment and enhance labor marketopportunities is needed in several fields. For instance, further efforts must be made to reverse the trend to early

retirement that is endemic, especially in a number of European countries. In

addition, policies to increase thelabor force participation of womenare an important factor in promot-ing employment.

It is crucial that such measures abolish existing barriers to laborforce participation and create positive incentives and opportuni-ties. Negative incentives, such asactuarial benefit reductions forolder workers retiring early, havenot been successful in increasinglabor force participation rates.However, positive measures, suchas combating age discrimination,educating employers on the specificskills and high productivity of olderworkers and support for creatingworkplaces that take into accountspecific needs of older workers,have significantly more potential. A proactive social policy that givesindividuals the opportunity to combine work and family through a network of childcare services andthat supports a family friendly workenvironment has, in some countries,proven to have a significant impacton labor force participation andover the longer term, improvingpension financing.

Dalmer Hoskins serves as SecretaryGeneral of the International SocialSecurity Association (ISSA).

The vast majority of the world’s populationis either without or has only inadequateaccess to social security protection.


In the 1970s the U.S. car manufacturer Oldsmobile had acommercial slogan ‘It’s not your father’s Oldsmobile’. Its goalwas to convince the public that the product was a radicalchange from the previous generation of cars. The sloganwould work remarkably well for pensions too.

When the fathers of the baby boom generation—I’m ababy boomer myself—saved for their retirement, their mainconcern was that they would die prematurely. It was not astrange thought. The average life expectancy was around67. So, the key goal for building their pension was to make sure that their families would not be left unattended.Nowadays, the main pension concern of my generation isthat we will outlive our savings.

With the exponential advances in medicine we can expectto live longer—many of us well beyond 80—and we needmore money to support us during that longer life span. It is

not uncommon to live between 20 and 40 years in retire-ment. And yet, few people seem to give much thought tohow they would like to spend that important life phase.

Increasing awarenessIn a survey ING recently held in the U.S. among peopleabove age 30, less than half of the people interviewedresponded they had at least spent a moderate amount oftime thinking about their retirement. Surveys in my homecountry, the Netherlands, paint a similarly dismal picture.Only about 12 percent of the population has a relativelygood idea of what income level they will have when theyretire. Half of the population doesn’t know and doesn’tthink about it, and that in a country that is internationallyadmired for its well-balanced pension system and which

ranks among the countries with the highest available fundedretirement reserves per capita in the world.

Increasing the pension awareness is a key challenge through-out the world in both mature and emerging markets. Clearly,the government has a task there, but private financial servicescompanies should also step up their efforts in providing adequate, timely and understandable information aboutpensions. Last but not least, people have their own individualresponsibility of preparing for their retirement.

Though the internet is a frequently accessed source of information, surveys indicate that in making these prepara-tions people prefer the personal advice of a professionalintermediary. In the ING survey in the U.S., 61 percent ofthe respondents indicated that they had or would consult aprofessional adviser.

Three pension pillarsThe sources of retirement income differ substantially acrossthe globe. The World Bank advocates a three-pillar model inwhich the first pillar consists of the government pension,which should provide a basis that equals the socially acceptedminimum. The second pillar is made up of occupational pension plans arranged by employers and employees and thethird pillar is for voluntary, personal arrangements people canmake to supplement their retirement income. Tax incentivesare vital in building pillar II and III pension provisions. The EETsystem is the most commonly used approach for taxation ofretirement savings. It means that contributions for retirementplans are tax deductible, that investment income on retirementsavings during the build-up phase is exempt from taxationand that benefits are taxed.

In many countries the first pillar is still the main or sometimeseven the only source of pension provision. Most of thesestate pensions are on a pay-as-you-go basis, which meansthat the pensions of the retirees are paid from the contribu-tions of the current workforce. With an aging populationand a declining birth rate, a smaller workforce has to pay thepensions of an ever larger number of retirees. As a result,state pensions in many countries are under considerablefinancial pressure and governments seek ways to cope with

This Is Not Your Father’s RetirementBy Jan Nijssen, Global Head Pensions and CEO Insurance Central Europe of ING Group

Increasing the pension awareness is akey challenge throughout the world inboth mature and emerging markets.


the burden of rising pension costs. Longer working hours,extension of the pensionable age, reduced state benefitsand shifting most of the burden to employers, employeesand individual citizens, are among the options listed tocope with these increasing pension costs.

Reforms around the globeMany countries are implementing or planning reforms oftheir pension system. A striking and successful example isthe Polish reform of 1999. In a big-bang operation, thePolish government built a second pillar with individualretirement accounts for more than 10 million workers thatcontains both mandatory and voluntary elements. A yearearlier, Sweden reformed its retirement system by offering atwo-tiered premium pension plan. The first part is a pay-as-you-go program that provides benefits based on a worker’slifetime earnings. The second part is an individual accountenabling employees to directly manage their retirementassets through mutual funds.

Combining collectivity and flexibilityAn important trend in occupational pensions is thatemployers, especially after the recent stock market crisis,seek to transform their defined benefit plans—in which the retirement benefits are guaranteed—into defined con-tribution plans. In such plans, the contribution is fixed butthe benefit depends on the generated investment income.

I firmly believe in finding a balance between collective soli-darity and individual responsibility. A possible solution is tomake a division in second pillar pensions according to theprinciple ‘available defined benefit—collective defined contribution’. In practice this would imply that the employerand the employee contribute fixed amounts to an individualpension plan. This plan has a defined benefit character upto a basic level and a defined contribution character for theremaining part. Employees should also be free in choosingfinancial services providers to fill in that defined contributionpart. Key advantages of this approach are that the partici-pants can be secure about the basis of their occupationalpension and that they are flexible in how they want toarrange the rest of the pension plan above that basic level.In other words, this approach combines the strength ofcollectivity with flexible, tailor-made solutions.

In addition, individual voluntary arrangements through lifeinsurance, annuities, mutual funds or savings accounts inthe third pillar can help those who want to supplement theirretirement income or who want to retire at an earlier stage.

Indeed, this is not your father’s retirement. Governments,industry and company pension funds, insurers and assetmanagers should work together in seeking sustainable

13.6%CANADA

4.5%AUSTRALIA

FRANCE11.1%

GERMANY9.6%

SWEDEN15.7%

UNITED KINGDOM5.5%

UNITED STATES2.5%

SPAIN13.2%

NETHERLANDS12.5%

JAPAN9.6%

ITALY9.5%

IRELAND19.1%

pension solutions for present and future generations. Theyshould adjust their perception about retirement and joinforces to educate and help people to protect themselvesand make adequate old age provisions.

Jan Nijssen is Global Head Pensions and Chief Executive OfficerInsurance Central Europe of ING Group. Headquartered inAmsterdam, ING has 112,000 employees in more than 50countries and total assets of EUR 830 billion.

*Data taken in 2002. Source: Organisation for Economic Co-operationand Development (OECD). “Main Economic Indicators: StandardisedUnemployment Rates.” Paris: OECD, May, 2004a.


These findings hardly constitute a ringing endorsement ofthe present status of both public and private pension plans.And small wonder.

As is the case in many countries, public discourse on pensionsand retirement security have been unduly influenced byneo-conservative ideology. These radical, right-wing viewsare buttressed with financial support from the corporatesector and relentless promotion by the media conglomeratesthat dominate the journalistic landscape in Canada.

The past decade has been characterized by a relentless, concerted attack on the role and viability of our two nation-al, public pillars of retirement security—the Canada PensionPlan (CPP) and the Old Age Security (OAS) program. Despitethe right’s best efforts to dismantle our public pensionregime, it has now conceded that recent contributionreforms have assured the long-term viability of the CPP.

However, as now structured, our public pension plans provideonly a minimum level of retirement support. In the absence ofincome from private pension plans and personal investmentincome, many seniors are condemned to a near-povertyretirement. This is why labor continues to press strongly forimprovements to the public pension regime.

It is clear that we can no longer count on the private sectorto provide even existing pension benefits to large numbers of workers. The United States has its Enron. We have our Air Canada and Stelco Steels—high-profile corporate collapses that threaten the viability and payouts of work-place pension plans.

Beyond these extreme examples, we see employers playingthe ‘competitiveness’ card to force a change from definedbenefit to defined contribution plans. This, too, is a daggeraimed at the heart of secure retirement. Yet, in non-unionworkplaces, employees are basically powerless to resist suchimposed changes.

Nor can working families count on personal investments forretirement income supplement. Many have seen their networth decimated in the dot-com meltdown and stock market

Another Homeland Security:Strategies for Protecting PensionsBy Ken Georgetti, President, Canadian Labour Congress

Organizers of the ‘Reinventing Retirement’ Conference haveasked me to address strategies for adequate retirementincome. I would make three immediate observations.

First, while my remarks are informed by the situation in myown country, Canada, I believe they are readily applicable tomost developed economies.

Second, the high-profile debate over mandatory retirement isin fact secondary to the real issue: that an informed, personalchoice whether or not to retire cannot be realistically madein the absence of secure, adequate retirement income.

Third, while many at this conference will call for newapproaches, I would suggest what is truly needed is a returnto the more certain and adequate pension environment of ageneration ago.

Certainly, the status quo is widely seen as undesirable. Weat the Canadian Labour Congress this year commissioned anindependent poll to gauge public concerns with retirementsecurity. It should be noted that Canada is a country whereconsensus is often elusive. Yet, almost three-quarters ofCanadians are worried they will have insufficient income tosee them through their retirement years.

As well, five of six Canadians aged 55 and over rank retirement security of equal importance to health care. Thisis particularly telling, given that my country is currently fixated on a national debate over the funding and directionof public health care.

The past decade has been characterizedby a relentless, concerted attack on therole and viability of our two national,public pillars of retirement security…


We are still waiting for a formal response. With the governingLiberal Party now facing Parliament in a minority situation,we are nonetheless hopeful that we can advance ourconcerns in a meaningful way.

To sum up, a continuation along the path we have been following for the past few years will eventually lead us over aprecipice. Workers will find themselves with fewer benefits,less predictable payouts and greatly diminished retirementsecurity.

This, then, is hardly a viable ‘Strategy for an Aging World’.

Ken Georgetti is president of the three million memberCanadian Labour Congress. He chairs the Committee onWorkers’ Capital of the International Confederation of FreeTrade Unions.

Australia None

Canada 65 or later

France 65 or later

Germany 65 or later

Ireland No legal minimum1

Japan 602

Netherlands Employers’ decision3

Spain Employers’ decision3

Sweden Employers’ decision3

United Kingdom Permissible at any age

United States Illegal4

1 The common practice in firms that offer pensions is to set themandatory retirement age at the normal retirement age.

2 Mandatory retirement is permitted, with most large companies setting a mandatory retirement age of 60.

3 Employers may require an employee to retire solely because of age.4 For nearly all occupations, mandatory retirement is illegal.

Source: von Wachter, Till. “The End of Mandatory Retirement in the U.S.:Effects on Retirement and Implicit Contracts.” Center for LaborEconomics, University of California Berkeley, Working Paper No. 49,March 2002.

collapse of recent years. Again, each industrializednation can point to its own Nortel Networks—ahigh-flying, high-tech multinational whose shareshave collapsed into a fiscal black hole.

Taken together, all this points to the folly of relying onthe private sector to deliver the economic securityolder workers need and deserve as they face theirretirement years. The private sector has underminedthe stability of our retirement security system. It hasthreatened the quantity and quality of pension payouts.

In this regard, it is indeed lamentable that the public pensionregime in the United Kingdom has been so diminished. For it is British workers—not politicians, corporate directors orinvestment managers—who end up paying the true price.

Given the climate of private sector scandal and mismanage-ment, we have called for the managers of corporate pen-sion plans to exercise a higher degree of responsibility andoversight. The hard-earned contributions of our membersshould be invested in a socially-responsible manner thatmeets broad public needs, without risking returns on dubious investments.

I have never been one to share the view that the market’s‘invisible hand’ will set all things right. Governments mustplay an even more aggressive role in assuring public and private pension plans deliver the goods for working people.

Yet, if my own country is an example, policymakers pay precious little attention to retirement security.

In the face of this policy vacuum, the Canadian LabourCongress has called on our Prime Minister, Paul Martin, to

appoint a new Cabinet position—a Minister of State forRetirement Security. We have asked that this newly-createdCabinet Minister work with labor and business to initiate abroad national dialogue on retirement security.

In the face of this policy vacuum, theCanadian Labour Congress has calledon our Prime Minister, Paul Martin, toappoint a new Cabinet position—aMinister of State for Retirement Security.


While many countries of South America, Africa and theMiddle East have populations growing younger, Europe,Japan, and soon also China, have rapidly aging populationswhich will likely shrink in the medium to long term.

The economic costs and the real economic consequences ofan aging population cannot be deleted by reforms.

Politics can try to accomplish the following three goals:

1. Distribute these real costs in a way that is as favorablefor growth and employment as possible,

2. Distribute these costs as evenly as possible among allgenerations and

3. Achieve the highest possible level of financial sustain-ability. An old-age security system will be financed in a sustainable way if, on the basis of a given financingregime, the entitlements acquired may be fulfilled lastingly. In other words, no unplanned cuts of benefitswill be required in the future to achieve the contributiongoals and/or, starting out from an existing level of benefits, no unplanned increase in contributions will be necessary.

In general, a pension policy oriented towards sustainability inaging societies thus requires three things:

1. Reduction of labor costs—also by means of cuts in benefits—in the interest of employment and growth.

2. Compensation of the cuts in benefits by extension of fully-funded supplementary pension systems.

Re-tooling Retirement’s ToolsBy Bert Rürup, Chairman, Rürup Commission, Germany

3. Prolonging the working career to place the burden of costscaused by increasing life expectancy—hence the increasedperiod of pension receipt—on those persons who benefitfrom these additional years of pension payments (i.e. thefuture pensioners). Raising the statutory retirement agewill reduce the pressure on contribution rates and renderthe pension level more stable.

There are no safe pensions which are guaranteed or thepayment of which can be guaranteed. Pension claims arealways claims on a future national product, and as suchthey are tainted with uncertainty just like the future of the economy.

The two principles which can be applied for structuring orfinancing an old-age security system, the pay-as-you-go system and the funded system, are both offering specificadvantages and disadvantages and neither is a priori thebasically superior financing system.

The pay-as-you-go system is largely inflation-proof and highlyadaptable as it can be introduced and extended any time. Ifan old-age security system is introduced in a country, thiscan only be a pay-as-you-go system.

However, the pay-as-you-go system has the disadvantage ofdepending on the current employment situation and, in par-ticular, of being sensitive towards the demographic shifts inthe ratio of contributors to pensioners. In an aging society,pension systems on a pay-as-you-go basis regularly place theyounger generation at a disadvantage. To this extent, theyare unfair from an intergenerational point of view. Youngpeople have to pay continuously increasing contributions toacquire the same entitlements as the elderly, or they have tocontent themselves with lesser benefits when contributionrates remain at the same level.

Whereas the pay-as-you-go system relies on the stabilityand productivity of national income from work, the fundedsystem trusts in the stability and productivity of national andinternational income from capital. Probably the most impor-tant contrast to the pay-as-you-go system is the funded sys-

There are no safe pensions which areguaranteed or the payment of whichcan be guaranteed.


tem’s reliance on international capital markets. Due to thepossibility of investing assets for old-age provision abroad,it is possible to become independent of the national anddemographic developments and also of labor markettrends (within certain limits) and to use foreign real netoutput (expressed in capital gains and exchange profit) as an instrument for financing the domestic old-ageincome. However, this system has a cost of capital marketand foreign exchange risks for pensions holders.

Due to the specific advantages and disadvantages of bothfinancing systems and their different reactions to variouskinds of economic and demographic changes, there aremany arguments which support the view that—merely forreasons of risk heading—an “efficient“ and thus also“safe“ old-age security system should not onlyrely on one single financing principle, butshould be a system based on mixedfinancing.

There is no “scientific“answer to the questionabout the right mixbetween pay-as-you-go and capital fund-ing systems. Theanswer can onlyalways be a politi-cal one. And thisanswer does notonly depend onconfidence inthe long-termstability of capitalmarkets, but alsoon assessment of“distributiveacceptability“ inconnection with apartial transition frompay-as-you-go to a fullfunding system. Assumingthat in the long term, inter-est rates will be higher than thenational product growth or growthof total wages, there will be a perma-nent “yield advantage” for the capital fund-ing system. Simulation studies of an even partial transi-tion to the capital funding system, therefore, revealing thatthere will always be an additional burden on gainfullyemployed persons creating a “sandwich” generation. These

additional expenditures for old-age provision during theintroduction of the funded system will be the higher, themore far-reaching such a change is.

There can be no guarantee of a standard of living in thetrue sense of the word. Therefore, in these societies,

the one-dimensional state pension systemsmust be replaced by multi-dimensional

protection systems consisting of public and private elements

which will then jointly guarantee this standard

of living.

The social stateapproach of policywithin the terms ofan income-relatedprotection of oldage will then alsono longer bereflected only by a stabilization ofthe state systemsbut, to an increas-ing extent, by the

political organiza-tion, regulation and

control of private and occupational

supplementary pensionsystems. The active social

state will more and more turninto an activating and regulatory

social state.

Bert Rürup is an economist and pensionsexpert who heads a commission which is examining

the German system of pensions.

There is no “scientific“ answer to the question about the right mix between pay-as-you-go and capital funding systems.

The Employee Retirement Income Security Act of 1974,also known as ERISA, marked a turning point for employer-sponsored retirement systems in the United States. Pre-ERISApension design generally focused on employees who werewith an employer for 30 years or at the normal retirementage and sought retirement with meaningful income replace-ment. Currently, the programs in existence today closest tothis vision are those established for the military. For example,a U.S. soldier can end a 30 year career at any age with aninflation indexed 75 percent of final pay annuity for life plusmedical protection.

ERISA standards moved the U.S. pension focus to accrual,rentitlement, and cost for even short service workers. This shiftin focus led to the redistribution of cost and cost increases inorder to maintain benefit formulas. It also led to a conceptual“equality” of defined benefit and contribution systems. Theintroduction of “hybrid” Defined Benefit designs (definedbenefit funding with communication of an individual accountbalance between provider and retiree), and widespread

adoption of lump sum distributions to retirees in place oftraditional annuities.

ERISA also established the Pension Benefit GuaranteeCorporation (PBGC). The creation of PBGC, combined withtightened accounting standards, the enactment of heavytaxing on asset reversions, and a tighter defined benefitfunding standard, has enhanced the attractiveness of definedcontribution plans and moved thousands of employers toend their defined benefit plans.

The U.S. Congress followed ERISA with a major re-design ofthe pension system for government employees. Congressacted in 1984 to make a major cut in the defined benefitformula while adding a rich voluntary participation 401(k)-type plan (section 401(k) to our tax code Revenue Act of1978). Following the Act, the government essentially gaveits blessing to a shift in benefit strategy from a focus onincome replacement levels, to an emphasis on expensemanagement, competitive measurement, an increase in

Fear Factor: The Shift of Retirement Risk to the Individual in the U.S.By Dallas L. Salisbury, President, Employee Benefits Research Institute (EBRI), U.S.

0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79Age Age

Po

pu

lati

on

in

Mil

lio

ns

80-89 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70-79 80-89

2422201816141210

86420

Male Female


Source: U.S. Census Bureau. “International Data Base.” Washington, D.C.: U.S. Census Bureau, 2004 (March).

33%33%CANADACANADA

91%91%AUSTRALIAAUSTRALIA

FRANCEFRANCE100%100%

GERMANYGERMANY46%46%

SWEDENSWEDEN

90%90%

UNITED KINGDOMUNITED KINGDOM

46%46%

UNITED STATESUNITED STATES

45%45%

NETHERLANDSNETHERLANDS

91%91%

JAPANJAPAN

50%50%

ITALYITALY

5%5%

IRELANDIRELAND50%50%

33%CANADA

91%AUSTRALIA

FRANCE100%

GERMANY46%

SWEDEN

90%

UNITED KINGDOM

46%

UNITED STATES

45%

NETHERLANDS

91%

JAPAN

50%

ITALY

5%

IRELAND50%


short-service workers, and lump sum distributions. To a largeextent the U.S. private-sector employer-sponsored systemfollowed the federal lead as it began a steady shift away fromtraditional annuity paying defined benefit plans in the 1980’s.

Traditional annuity defined benefit plans place both longevityrisk and investment risk with the employer. However, whennot indexed for inflation, they place price risk on the retiree.Industries that find themselves in a situation of decliningemployment with a growing retiree population have foundit difficult to maintain their plans. The U.S. has seen theend of millinery, milk trucks, steel, and airline plans withother industries expected to follow.

The PBGC is finding itself in a troubling financial position astalk of a “bailout” becomes more common. The inability toregulate the financial markets or the lifespan, lead to erraticdefined benefit plan contribution swings which have becomeincreasingly unacceptable to the analysts of Wall Street whoare focused on steady earnings, growth, and predictability.

Beginning in 1984, employers began experimentation with“hybrid” defined benefit plans that communicate benefitsas a lump sum value, and nearly always offer lump sum distributions. This design shifts longevity risk to the individualthat chooses the lump sum. In addition, these plans aredesigned to offer a steady rate of benefit accrual over time,as opposed to the final pay formulas common to traditionalplans, resulting in a lower contribution cost and greaterlong-term predictability.

In recent years many employers have begun to halt newentrants and end added accruals in these plans in order tocut costs further. There is major litigation pending thatinvolves IBM and its conversion to a cash balance plan, andan absence of U.S. regulatory clarity on what plan designsare legal, that are accelerating this push away from anytype of defined benefit plan. Over 600,000 U.S. employershave migrated to sponsorship of defined contribution plansas their only pension plan. They offer the employer the abilityto budget annual cost and place participation, contribution,investment, inflation and longevity risk with the individual.

Currently 43 percent of U.S. workers participate in some typeof retirement plan other than Social Security and 57 percentof full time workers. The good news is that these numbersare higher than they have ever been. Further, more workersare accumulating account balances today than at any time inU.S. history. Among those who could participate in definedcontribution plans, 25 percent choose not to do so. Of thosewho do contribute to defined contribution plans, they con-tribute an average 6.4 percent of their pay, far less thanrequired to produce adequate savings. Nearly all take lumpsum distributions. Among those who leave jobs at early ages,

much of that money is spent early in life so that retirementsavings must start over. Most do not have good investmentliteracy, and few understand longevity and the “risk” it carriesfor running out of money, and how little you can spendeach year of a nest-egg if you do not want to run out.

These facts lead many U.S. employers to consider designchanges: automatic enrollment to deal with


Sources: (1) Bertelsmann Foundation. “International Reform Monitor:Pension Provision (Spain).” 2004a. (2) Dalton, Philip. “Personal RetirementSavings Accounts (PRSAs)—Individual Pension Investment Vehicles.” Paris:OECD, 2004. (3) Whitehouse, Edward. “Pension Systems in 15 CountriesCompared: The Value of Entitlements.” Centre for Pensions andSuperannuation Discussion Paper No. 02/04, London, April, 2002.


Defined benefit (DB) pension plans face severe challenges.Contribution requirements are escalating sharply. Accountingcosts suddenly are high and volatile, while looming accountingchanges threaten greater volatility. Executives question planswith insufficient assets and poorly defined risks. Are pensionplans still a good solution? Despite serious challenges, a welldesigned and well communicated DB plan actually createssubstantial value for both employer and employee, and canbe a source of competitive advantage for the employer.

Background: A changing landscapeMost mature pension plans were designed to provideretirement income to long-term employees on a tax-effectivebasis. They help organizations retain employees, provideworkers a graceful transition to retirement, and help keepdirect compensation and taxes lower. The retirement planoptions available to employers changed dramatically when it

became possible for U.S. employees to save pre-tax dollarsin 401(k) plans, starting in 1981. Employers quickly addedmatching to their savings plans and this benefit pattern spreadto different countries. During the bull market of the 1990s,many employees began to believe their defined contribution(DC) plans would make them rich and allow early retirement,while financial executives became accustomed to holidaysfrom contributions for traditional pension plans. The bearmarket early in this decade quickly changed these perceptions.Employees face working longer to afford a comfortableretirement, and executives confront sharply higher contribu-tions and expense for defined benefit plans.

Meeting changing needsCitizens in industrialized countries expect to retire earlier,live longer, and use more medical care than any previousgeneration. Traditional pension plans have declined andresponsibility for retirement security has shifted to employees.Savings rates vary greatly by country, but Americans’ savingsfar fall short of what is needed to meet their retirementexpectations even though a variety of opportunities for taxsheltered savings are available. Practice differs but traditionalplans usually pay benefits as monthly income in many coun-tries. It’s time to remember that employer-sponsored pensionplans can create significant value for both the employee andthe employer by addressing the shortcomings of DC plans.

Value creation: Tapping the potentialAn employer-sponsored benefit plan creates value if it provides either the same benefit for a lower cost than couldotherwise be obtained or a greater benefit for the samecost. For example, employer-sponsored insurance plans create value by pooling risk and purchasing power. Benefitsare provided to all employees at a cost less than for whichindividuals could purchase the insurance.

Pension plans have similar characteristics, but they are oftenoverlooked because of the deferred nature of the benefits.Pension plans create value by pooling both longevity andinvestment risk and by reducing expenses.

How long will you live?Pooling longevity risk creates value in two ways, one rathereasy to recognize and one quite subtle, but both significant.First, consider how long an individual will need retirementincome. If your retirement fund is adequate to last the averagelife expectancy, you stand a 50:50 chance of outliving yourassets. Not the odds most would choose for such a criticalissue. But how much more is really enough? If you are satis-fied with 2:1 odds that you will not outlive your assets, youwill need approximately 11 percent more assets. With 4:1odds, you would need about 20 percent more, and with10:1 odds, at least 26 percent more.

On the other hand, an employer-sponsored pension planthat covers thousands of employees can pool the longevity

Defined Benefit Plans—Still a Good Idea?By Anna M. Rappaport, F.S.A. and Don Fuerst, F.S.A.

During the bull market of the 1990s,many employees began to believe their defined contribution (DC) planswould make them rich and allow early retirement…

risk and fund for the average life expectancy with a highlevel of confidence that the funds will be sufficient. Thevalue created ranges from 10 percent to 25 percent.

The second aspect is subtler. Pooling longevity risk in a pensionplan allows a plan to fund benefits more effectively evenfor a specific number of years. A pension plan will have someparticipants who die well before the average life expectancyand some who die much later. The benefits saved (not paid)to those who die early are invested and earn income that isused to pay the benefits to participants who live past theirlife expectancies. The two longevity factors (blendinglongevity plus blending resources among a group) createvalue of 15 percent to 35 percent.

Investment managementInvestment pooling also creates significant value by offeringliquidity, professional management, asset allocation, andexpense reduction.

An investor needing a monthly income must keep some fundsin liquid form thus lowering investment income. An employer-sponsored pension plan needs a much smaller percentage ofliquid funds due to the mix of active and retired participantsand inflow of ongoing employer contributions.

Most defined contribution plans rely on the individual to makeinvestment decisions. Employer-sponsored pension plansgenerally have a team of investment professionals who areinvesting millions, often billions of dollars compared to thethousands of dollars that individuals invest. Both transactioncosts and investment management costs are significantly

lower for employer plans. Consider these factors togetherand it is easy to understand why the typical pension planreturn exceeds the typical DC return by 100-200 basis points


An employer-sponsored benefit plan creates value if it provides either the samebenefit for a lower cost than could otherwise be obtained or a greater benefitfor the same cost.



An aging population is a great achievement. Longer lifeexpectancy in the EU says much about how we have organ-ized our society. It is to be celebrated that people now canachieve a healthy old age. Aging is changing our societies rapidly and our cultural and policy framework needs to adapt.

Older people make up a large, growing and diverse sectionof the population. AGE’s vision is of a society for all ages,where individuals enjoy equal rights in terms of their workingand living conditions and their participation as citizens. We

believe that age equality will not only benefit older individuals,but also society at large. However, at present, older peopleare often disadvantaged and face discrimination in manycontexts. Age discrimination is based on ageism, i.e. theuse of stereotypical images about individuals’ capabilitiessolely on the grounds of their chronological age and agediscrimination is apparent in many areas: employment,access to goods and services, health care, education, etc.

In the framework of the Lisbon Strategy, the Member Statesof the European Union set themselves ambitious targets toincrease the participation of older people in the labor market.They want to increase the participation rate of older workers(55-64) from the current 38.8 percent to 50 percent by 2010.In 2001, only 29.1 percent of women over 55 and 48.8 percent of men over 55 were still active in the labor market.Even in the countries who have already reached the agreedtargets, figures need to be broken down per region andgender to give a clearer picture of the poor involvement ofolder workers in the EU labor market.

Most countries only recently started to take measures to keepolder workers on the labor market. Unfortunately most ofthem are taking a rather negative approach based on theassumption that long-term unemployment is due to unwilling-ness to work. In their attempt to “make work pay”, govern-ments cut long-term unemployment benefits, abolish earlyretirement schemes and force people into low paid, poorquality jobs rather than address the many barriers that preventolder workers to remain active. Forcing older workers toremain in employment by reducing their social protectionrights is only going to make their lives even more miserableand increase social exclusion and poverty. As long as negativestereotypes exist about older workers, as long as age discrimi-nation is not sanctioned, as long as older workers do not havesufficient access to training and as long as employers do notunderstand that they need to adapt the workplace to theneeds of older workers, the employment rate of older workerswill not improve in the EU. Active labor market policies targeting older workers are needed to help the EU access thehuge untapped human capital available among older people.

One of the key ways of keeping older people employedlonger will be the introduction into national pension schemes

AGEing in Europe: Realizing and Promoting the Contributions of Older People By Anne-Sophie Parent, Director of AGE: The European Older People’s Platform

AUSTRALIA 27.9%

CANADA

FRANCE 32.1%

GERMANY 35.4%

IRELAND 25.8%

ITALY 36.3%

JAPAN 38.2%

NETHERLANDS 31.0%

SPAIN 33.0%

SWEDEN 36.1%

UNITED KINDGOM 32.6%

UNITED STATES 27.4%

28.4%

*Data taken in 2000. Source: U.S. Census Bureau. “International DataBase.” Washington, D.C.: U.S. Census Bureau, 2004 (March).


of a flexible mix between work and retirement. The successof labor market reforms will depend largely on successfulreforms in pension systems. Ill-conceived reforms of pen-sion systems (e.g. a general increase of the pensionableage) may create an influx of the number of people on dis-ability pensions.

Furthermore, as noticed by the European Commission in itscommunication to the last Spring Summit, poverty in oldage is increasing in most Member States and governmentsshould pay special attention to the most vulnerable whenreforming their pensions systems. The vast majority ofolder people with insufficient income have just not had theopportunity to build an adequate pension due to illness,career breaks for caring duties, long-term unemployment,discrimination and social exclusion. In AGE’s view, modern-izing pension systems needs to take particular account ofthe atypical career patterns of women as well as their longlife expectancy and their greater likelihood to developchronic illness. The policy trends that promote a closer link between contribution and benefit, focus on individualsaving for retirement and increase the number of yearsneeded to qualify for a full pension need to take accountof the fact that older people need to be compensated for very valuable -yet unpaid- work they do as informalcarers for dependents, grandchildren, children, elderly relatives, etc.

The concept of active aging promoted by the Europeaninstitutions only seems to focus on older employees. However,active aging is about much more than employment. Afterretirement age, most older people continue to contribute tosociety in a voluntary capacity, as consumers, carers, etc. Thelack of accurate information on the economic contribution

of older people to society contributes to stereotyping olderpeople as unproductive and dependent. AGE is campaigningfor more research to be undertaken at European level toexplore the tremendous contribution older people make to

society through their volunteering and caring activities ashas already been done in Canada and Australia. AGE believesthat dealing with the challenges of an aging society will beimpossible without the active involvement of older people.

Anne-Sophie Parent is the Director of AGE: The EuropeanOlder People's Platform, a position which she has held since2002. AGE is a European umbrella confederation of more than100 federations and associations of older and retired people ororganizations dealing with aging issues.

One of the key ways of keeping older people employed longer will be the introduction into national pensionschemes of a flexible mix between workand retirement.


Things have changed since the baby boom generationstepped into the labor market during the seventies. Facingan economic recession, only a few of those young babyboomers were able to find a job. In many European coun-tries, politicians (together with social partners) realized this

situation not only could undermine their economies but alsoit would be a threat for social peace. They considered earlyretirements the cure.

Nowadays, we find ourselves in a totally different situationcompared to thirty years ago. The baby boom generation,those who were born in the decades of euphoria after

World War II, now no longer steps into the job market butrather begins to step out of that market. For thirty years allsystems of early retirement were seen as the solution topotential unemployment on the continent, a win-win situation,employers could easily restructure and employees could retireat age 55 (in Belgium at 50) without spending a euro less.

When we talk about procedures of early retirement, Belgiumalways has been (and still is) Europe’s finest student. But Iwould leave up to you if this really is a title to be proud of.With no more than 28 percent of workers among the groupof people older than 55 years, Belgium could better be considered as the class’ worst student. Statistics showBelgians do not work long, but they have the highest productivity during their labor period.

The situation we are now facing in Europe could be dramaticif no one is willing to change. Therefore, the first step weshould take is to change people’s mind set. Procedures ofretirement during the past thirty years made it look as ifearly retirement was an untouchable attainment, but wemust finally acknowledge that such is no longer the case.As a society, we must ask ourselves if we can afford to sendhome productive, experienced men and women at an ageof 55 or not to encourage people of 45 years old to receiveextra training. Can we afford the unemployed who pass the

Early Retirement: Disease of the European Continent?By Annemie Van de Casteele, President, Commission on Social Affairs in Belgian Senate

AUSTRALIA CANADA FRANCE GERMANY IRELAND ITALY JAPAN NETHERLANDS SPAIN UNITED STATES

9.9% 10.5%

0.6%

4.4%

14.2%

6.2%

31.1%

5.4%

2.4%

17.9%

3.1% 3.7%0.3%

1.8%

3.0%1.6%

13.2%

1.4% 0.9%

9.8%

Male Female

As a society, we must ask ourselves if wecan afford to send home productive,experienced men and women at an age of 55 or not to encourage people of 45years old to receive extra training.

Source: International Labour Organization (ILO). LABORSTA. 2004.


age of 50 to end their search for new jobs, and allow themto receive payment for staying “not useful” till they retire.Older employees in companies should be judged on theircapacities instead of being put aside because of their old-fashioned way of working.

If we do not reform our job market drastically, especially incontinental Europe, like the way we did in the seventies,consequences will be huge. A reorganization of the marketshould start with the baby boomers who now willing tostep out of the workforce. Our social security system cannot afford an immediate and large withdrawal in thenext ten years because younger people who are now step-ping into the job market (and who begin to contribute the welfare system) are nothing but a fraction of the numberof retirees. One youngster replacing one elder would be aperfect scenario, but it is far from realistic. Doing nothingwill leave a social security system unable to support allwho are eligible to retire, especially if the workforceshrinks while life expectancy increases!

Baby boomers must realize that early retirement is no longeran option. To bear the costs of an aging population, thisbaby boom generation must understand they have to worktill the age of retirement. That age may remain at 65 as italready is in most of the EU countries.

Instead of reducing older people’s motivation, our societyalso has duties to baby boomers. Someone in his fifties needsto be encouraged to labor without penalty. A financial bonusfor this group could be an incentive. Keeping older people atwork is not simply a pure financial issue either, as it remainsalso a matter of motivation. Why should the elderly receivegreater appreciation on the work floor? Give them insteadseniority for new vacancies in the company. Some seniorsmay have physical limitations, but if they can occupy companypositions which facilitate and meet their limits, why banishthem to retirement? They have more than enough experience.Most of them know how the company works. They can trainyoungsters in the company. Further, social contacts withinthe company would be beneficial to the older employee toavoid another serious problem aged people sometimesexperience, social isolation and dislocation.

One thing is for sure, the clock is ticking. We need to beaware of this new challenge and must reorganize. To waitanother ten years would probably be too late.

Annemie Van de Casteele is the president of theCommission on Social Affairs in the Belgian Senate.


G L O B A L F O C U S O N P E N S I O N I N C O M E

AustraliaSOCIAL SECURITYContributions: Employee–none; Employer–9 percent formandatory occupational pensions; none for means-testedbenefits

Eligibility age for old-age benefits: 55 for mandatoryoccupational pensions if no longer working. The eligibilityage is 55 for both men and women born before July 1,1960. For those born after that date, but before July 1,1961, the minimum age is 56. The minimum age rises byone year for every subsequent annual birth cohort until itreaches age 60 for persons born after June 30, 1964. Thusthis increase takes effect in the period 2015-2024, with peo-ple born on July 1, 1964 being able to collect their pensionat age 60 in 2024. For means-tested benefits, the eligibilityage is 65 for men. Australia is also raising the minimum age at which a woman can receive its means-tested pension.It will be raised by six months every two years, from age 60in 1995 to age 65 in 2013.

The Australian social security system consists of two parts:(1) the means-tested benefit (called the Age Pension) whichthe majority of retirees receive, and which is financed on apay-as-you-go basis by general government revenues, and(2) the mandatory employer-provided occupational pension(called the Superannuation Guarantee).

Benefits: The benefits from the means-tested program areflat rate (not related to earnings). Entitlement is based on age,residency status, income, and assets, but not on employmenthistory. The benefits from the mandatory occupational pen-sion system are generally received as a lump sum.

OCCUPATIONAL PENSIONSA mandate requires employers to provide occupationalpension plans that cover all except low-wage workers.Most of these pension plans are defined contribution.

Occupational pension coverage rate in 2002: A mandaterequires employers to provide occupational pension plansthat cover all except low-wage workers. Most of these pension plans are defined contributions.

MANDATORY RETIREMENTMandatory retirement is not permitted. Older workers arealso protected from age-based discrimination in hiring, promotion, and dismissal.

CanadaSOCIAL SECURITYContributions: Employee–4.95 percent; Employer–4.95 percent

Eligibility age for old-age benefits: 60. The Canadiansocial security system consists of three parts: (1) the Old-AgeSecurity program provides flat benefits based on years ofresidence in Canada (unrelated to earnings), but there is a“claw back” of benefits paid to high income retirees.Benefits are available at age 65. (2) the Canada Pension Plan(CPP) and Quebec Pension Plan (QPP) are the main part ofthe social security system, and they provide earnings-relatedbenefits at age 60. In most respects, these two plans providesimilar benefits. (3) the Guaranteed Income Supplement pro-vides additional benefits to low-income recipients.

Benefits: The CPP and QPP provide a maximum retirementpension equal to 25 percent of the contributor’s career aver-age monthly pensionable earnings. The Guaranteed IncomeSupplement provides means-tested benefits.

OCCUPATIONAL PENSIONSOccupational pension plans are established voluntarily byemployers. While defined contribution plans have beengrowing in importance, defined benefit plans still cover mostworkers and provide the majority of benefits. Occupationalpension law is enacted at the provincial level and differs tosome extent among the provinces.

Occupational pension coverage rate in 2002: 33 percent

MANDATORY RETIREMENTMandatory retirement is regulated at the provincial level. It islegal at age 65 or later in the province of Ontario, but it isnot legal in the province of Quebec or some other provinces.

PHASED RETIREMENTThe province of Quebec has instituted options for phasedretirement that are not available in the other provinces, butfew people have taken advantage of these options. Forexample, workers can reduce their work in the period beforeretirement and continue contributing to the Quebec PensionPlan (QPP) at the same level as before the reduction in work,thus continuing to accrue QPP benefits at that level.



FranceSOCIAL SECURITYContributions: Employee–6.55 percent, up to a wage ceil-ing; Employer–9.8 percent, up to a wage ceiling

Eligibility age for old-age benefits: 60. A reform in 2003allows early retirement between ages 56 and 59 for peoplewho entered the labor market between ages 14 and 17 andwho worked 40 to 42 years without interruption other thanfor illness, maternity or military service. Many workers claimunemployment benefits for a year or two before they retire,allowing them to exit the labor force before age 60.

More than 30 different mandatory social security programscover different categories of workers. The general programcovers all wage earners in the private sector, but other pro-grams cover agricultural workers, public sector workers, mili-tary personnel, national train company employees, electricityand gas company employees, and self-employed workers.

Benefits: For a worker who has contributed for 40 years,full benefits equal 50 percent of the worker’s average annu-al salary below the social security wage ceiling. Starting in2009, the number of years of contributions for full benefitswill increase by one calendar quarter per year until it reaches 41 years in 2012. Thereafter, the contribution period will increase as needed to keep the ratio of the contribution period to the average retirement period equalto two to one.

OCCUPATIONAL PENSIONSFrance has a system of mandatory occupational pensions.The largest two (AGIRC and ARRCO) cover most private sector workers. They are financed on a pay-as-you-go basis.


MANDATORY RETIREMENTMandatory retirement is legal at age 65 or later. Also,employers can engage in collective bargaining to setmandatory retirement at a lower age.

GermanySOCIAL SECURITYContributions: Employee–9.55 percent; Employer–9.55 percent

Eligibility age for old-age benefits: 65–with 5 years ofcontributions; 63–with 35 years of contributions; 60–with15 years of contributions and being unemployed one year. (Continued on page 24)

By 2010, the age 60 limit will have been raised to 62 withthe requirements of 35 years of contributions and one yearof unemployment dropped. Unemployment benefits serve asa bridge to retirement for many workers.

Benefits: Benefits after retirement are indexed to earningsnet of taxes, an approach that is more generous than themore usual indexation to prices.

OCCUPATIONAL PENSIONSOccupational pensions in Germany are established voluntarilyby employers and are primarily defined benefit plans. Manyof these plans are financed by the book reserve method,where they are treated as liabilities on the books of thecompany but no separate funds are set aside. A mandatoryinsolvency fund protects vested defined benefit plan bene-fits. Occupational pension options were expanded in 2001with the Riester reform, named after a former LaborMinister. The Riester reform gives all employees the optionof a tax subsidized contribution to personal pensions. Themaximum contribution started at one percent of wages in2002 and rises to 4 percent in 2008.


MANDATORY RETIREMENTMandatory retirement is legal at age 65 or later.

IrelandSOCIAL SECURITYContributions: Employee: 2 percent of the first Euro127per week in 2004, plus 6 percent of the remaining balance,up to a ceiling; low-income workers earning less than Euro287 excluded. Employer: 8.5 percent for employees withweekly earnings of Euro 356 or less; 10.75 percent foremployees with weekly earnings greater than Euro 356.These contribution rates for employees and employersfinance a unified social insurance program that provides old age retirement benefits, unemployment benefits, healthand sickness insurance, occupational injuries benefits, andsurvivors’ benefits.

Eligibility age for old-age benefits: 65, requiring retire-ment. Benefits can be received at age 66 or older while continuing to work.

Benefits: Ireland provides flat benefits, not related to theperson’s previous earnings. These benefits are reduced if theperson’s average number of weeks worked per year is lessthan 48.



The main difference between the way that social securitypensions are provided in Ireland and other OECD countries isthat the contributions are pay-related while the benefits areflat rate.

OCCUPATIONAL PENSIONSBoth defined benefit and defined contribution plans areestablished at the initiative of employers, with defined bene-fit plans predominating.


MANDATORY RETIREMENTThere is no legal minimum for mandatory retirement ages.The common practice in firms that offer pensions is to setthe mandatory retirement age at the normal retirement age.

PHASED RETIREMENTWorkers can receive a social security benefit and also workat age 66 and older.

ItalySOCIAL SECURITYContributions: Employee–8.89 percent; Employer–23.81percent

Eligibility age for old-age benefits: 57. Italy has a seniori-ty pension that workers can receive at any age as long asthey have worked a specified minimum number of years. As of January 1, 1999, the required number of years wasincreased; it was 37 in 2002 and rises to 40 by 2008.Workers can also qualify for the seniority pension at age 57 with 35 years. A reform in 2004 raised that qualifyingcondition to age 60 with 35 years, as of 2008.

OCCUPATIONAL PENSIONSOccupational pensions are established voluntarily by employers and play a relatively small role in providing retirement income.


MANDATORY RETIREMENTMandatory retirement is legal at age 65 or older for men andage. 60 or older for women.

JapanSOCIAL SECURITYContributions: Employee–6.79 percent; Employer–6.79 percent; Government—The government contributes one-third of the cost of the National Pension program. TheNational Pension (NP) program provides a flat benefit, unre-lated to the person’s previous earnings. The Employees’Pension Insurance (EPI) program provides an earnings-relatedbenefit for most workers, with other mandatory programscovering some occupational groups.

Eligibility age for old-age benefits: 60 for EPI benefit,age 62 for NP benefit in 2004.

Workers must contribute 25 years to be eligible to receivebenefits. The increases in the eligibility age have been legis-lated for both EPI and NP benefits, with both eventuallyreaching age 65.

Contracting out: Under some circumstances, employeesparticipating in defined benefit plans are able to withdrawfrom part of social security, so long as they have a pensionplan of sufficient generosity. If the employer is contracted-out, the contribution is between 6.775 percent and 7.075percent of monthly payroll.

OCCUPATIONAL PENSIONSOccupational pension plans are established voluntarily byemployers and are primarily defined benefit plans. In 2001,defined contribution plans were permitted for the first time,but attempts to encourage defined contribution plans havemet with only limited success. A mandatory insolvency fundprotects vested defined benefit plan benefits.


MANDATORY RETIREMENTMandatory retirement is permitted, with most large companiessetting a mandatory retirement age of 60.

NetherlandsSOCIAL SECURITYContributions: Employee–17.9 percent for old-age pension,1.25 percent for survivor pension; Employer–5.85 percent

Eligibility age for old-age benefits: 65

Benefits: Flat benefits (called the AOW plan) based on yearsof residence in the Netherlands between ages 15 and 65(not based on earnings and not based on years of work)

Ireland (Continued from page 23)



OCCUPATIONAL PENSIONSWidespread occupational pensions are provided by industry-wide defined benefit plans. Membership in these plans isgenerally mandatory for all employees in the industry.Funded occupational pension plans play a large role in providing retirement income in the Netherlands. The largestpension fund in the world in terms of assets is the ABP pension fund for Dutch civil servants.


MANDATORY RETIREMENTEmployers may require an employee to retire solely becauseof age.

SpainSOCIAL SECURITY

Contributions: Employee–4.7 percent; Employer–23.6 percent; Government—An annual subsidy of approximatelyone-third of benefits paid

Eligibility age for old-age benefits: Age 65 but undertransitional provisions entitlement to a reduced pension isavailable at age 60.

Age 64 if the position of the retiring worker is to be takenby a person registered as unemployed. A person must stopworking to receive benefits. The retirement age is lower fordifficult, dangerous, or unhealthy work. Early pension: Age61 with 30 years of contributions if the insured is involuntar-ily unemployed and registered as a job seeker for at least 6months before applying for the pension.

OCCUPATIONAL PENSIONSOccupational pensions are established voluntarily by employersand play a relatively minor role in Spain.


MANDATORY RETIREMENTEmployers may require an employee to retire solely becauseof age.

SwedenSOCIAL SECURITYContributions: Employee–7 percent up to a ceiling;Employer–10.21 percent (no ceiling on wages covered)

Workers are credited with a total contribution rate of 18.5percent —16 percent for a national defined contributionplan and 2.5 percent for a mandatory defined contribution

plan (called the Premium Pension). The difference betweenthe 17.21 percent and the 18.5 percent arises because pen-sion contributions are based on gross income while the cred-iting for pension benefits is based on net income, which isgross income minus social security contributions.

Eligibility age for old-age benefits: 61. Sweden instituteda major reform to its retirement income system in 1999.There are three parts to the social security system. Thenational defined contribution plan is the primary part, providing earnings-related benefits. There is a mandatorydefined contribution individual account plan. Lastly, there is a means-tested plan that provides benefits starting at age 65.

Benefits: The national defined contribution plan is expectedto provide benefits of about 35 percent of final salary for aworking career of 35 years. The benefits are adjusted down-wards at the point of initial receipt for increases in lifeexpectancy relative to the proceeding annual birth cohort.The amount provided by the mandatory defined contribu-tion plan will depend on what investment funds the workerchooses to invest that in and how well those funds perform.Benefits to current retirees, however, are almost entirelybeing paid from the former system.

OCCUPATIONAL PENSIONSThese plans are widespread, having been established bynationwide collective bargaining. Membership is compulsoryfor all eligible employees of an employer covered by the collective agreement regardless of whether they are tradeunion members. Sweden’s collectively bargained multi-employer plans have changed from being defined benefit to defined contribution as a result of the social securityreform in 1999. The collective agreement pension is definedcontribution for private employed blue-collar workers, formunicipal and county council employees, and starting in2003 for state employees. Only private sector white-collarworkers have kept defined benefit plans.


MANDATORY RETIREMENTEmployers may require an employee to retire solely becauseof age. Private sector employers cannot require mandatoryretirement before age 67.

PHASED RETIREMENTWorkers can claim full or partial benefits (one-quarter, onehalf or three-quarters) from their social security pensions.They can continue working while they draw benefits, inwhich case, they continue contributing to the system.




United StatesSOCIAL SECURITYContributions:Employee–6.2 percent of earnings up to amaximum; Employer–6.2 percent of earnings up to a maximum

Eligibility age for old-age benefits: 62 for old age benefits,age 60 for survivors benefits.

Benefits: Earnings-related benefits; for a worker who earnsthe average wage for a 35-year worklife, the replacementrate is about 40 percent of career average earnings whenbenefits are taken at age 65.

OCCUPATIONAL PENSIONSOccupational pension plans are established voluntarily byemployers. Traditionally, occupational pensions were pre-dominantly defined benefit plans, but there has been along-term decline of defined benefit plans and a correspon-ding growth of defined contribution plans. A defined con-tribution plan that generally requires worker contributionsfor worker participation, called the 401(k) plan, is now thetype of plan with the most participants. A mandatory insol-vency fund protects vested defined benefit plan benefits.


MANDATORY RETIREMENTFor nearly all occupations, mandatory retirement is illegal.

United KingdomSOCIAL SECURITYContributions:Employee–11 percent of weekly earningsbetween an upper and lower earnings limit, 1 percent ofearnings over the upper earnings limit; Employer–12.8 percent of weekly earnings over the lower earnings limit.

Eligibility age for old-age benefits: Men–65; Women–60,rising gradually to 65 over the years 2010-2020.

Benefits:State basic pension—Flat rate retirement benefit based onyears of coverage but not earnings.

State Earnings Related Pension System (SERPS)/State SecondPension (S2P)—The State Earnings Related Pension Systemhas been replaced by the State Second Pension. Both pro-vide benefits based on revalued annual earnings.

Contracting out—Workers can withdraw from contributingto the earnings-related part of social security if they insteadcontribute to an alternative defined benefit or defined con-tribution plan. This option is open to all employees.

OCCUPATIONAL PENSIONSOccupational pensions, i.e. employer-sponsored plans, areestablished voluntarily by employers and are a relativelyimportant source of retirement income. They are providedboth as defined benefit and defined contribution plans.Defined contribution plans have grown rapidly in recentyears while defined benefit plans have been declining.


MANDATORY RETIREMENTMandatory retirement is permissible at any age.

PHASED RETIREMENTOccupational schemes are not currently permitted to paypension benefits to people while they are still working forthe sponsoring employer, but the Government hasannounced that the law will be changed to permit this.

(Continued from page 25)

the 25 percent non-participation; managed allocationinvestment accounts to deal with poor asset allocation andlow returns; annuities or level payouts to deal with longevityrisk. Policy analysts consider government action to providefor mandatory participation, mandatory rollovers of accountbalances upon job change, mandatory annuities, or at leastincentives for annuities, and other changes that might pro-vide some of the risk protection of traditional pensions.Recent research finds saving an added 5 percent per yearwould move many Americans into a “secure” range, and anannuity only policy would reduce the amount needed foroverall savings by 34 percent due to the virtues of pooledlongevity risk. Continued growth of individual accounts with

full individual choice suggests the alternatives in Americafor many will either be more years in the workforce or alower standard of living in retirement. Nearly two-thirds ofcurrent U.S. retirees rely almost totally on Social Security fortheir retirement cash income. Current U.S. trends suggestthat this percentage will grow in the years ahead.

Dallas Salisbury is President and CEO of the Employee BenefitResearch Institute (EBRI), in Washington, DC. EBRI wasfounded in 1978 to provide objective, unbiased informationregarding the employee benefit system and related economicsecurity issues.

accounting rules, and funding requirements in the U.S., andother countries have all contributed to the steady decline ofemployer participation in these plans. Help is badly neededin two areas: creating a stable, favorable legislative climateand focusing the public on the value of defined benefitplans paying regular income.

Conclusion: The best type of planIn today’s competitive labor market, most if not all employerswill want to sponsor a competitive savings plan. However,relying on a DC plan as the sole retirement vehicle will be expensive and inefficient for employers who want toencourage lower turnover, facilitate retirement of olderworkers, and create value for their employees. From theemployee perspective, a DB plan should give clear advantagesfor all except young employees who will not stay long witha company where DC plans (or cash balance DB plans) maywell be better value. Employers who offer a good balance willsee lower overall employment costs and a more productiveworkforce. Well-designed and well-communicated definedbenefit pension plans can create value and minimizeemployment costs.

Anna Rappaport, a worldwide partner and Principal in theChicago office of Mercer Human Resource Consulting, is anactuary and futurist with 40 years’ experience.




Fear Factor: The Shift of Retirement Risk to the Individual in the U.S.

Defined Benefit Plans—Still a Good Idea?

and sometimes much more. This could easily capitalize at acost saving of around 20 percent.

The pension plan also creates value directly for the employer.Pensions encourage continued employment, thus loweringturnover costs and helping to retain intellectual capital.Contributions are allocated primarily to those employeeswho stay with the organization—little is allocated to thoseemployees who leave after a few years or long beforeretirement age.

Pension plans deliver more consistent benefits to employees.The benefit level does not depend on the individual’s invest-ment skills or luck. DC plans produce large dispersion ofbenefits based on the investment choices of the individual.Participants who lack the knowledge, the skill, or simply theluck to be good investors are not disadvantaged in a pensionplan and can expect a level of retirement income less exposedto the vagaries of the investment markets than self-managedfunds would generate.

Support is needed for DB benefit plansDB pension plans can create value and help employees attaineconomically secure retirement. They are highly desirablesocially. But the deferred nature of the benefit, the employerrisks associated with the plans, and the complex regulations,

Editor-in-Chief:Ladan Manteghi

Executive Editor: John Gray

Managing Editors: Michael HoltzmanMarta Obrebska

Bradley SchurmanHolly Schulz

Contributing Writers: John Turner

Sophie M. Korczyk

Contributing Editors: Patrick deGategno

Ka’Neda EllisonKimberly Wolf

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W H AT T H E L E A D E R S A R E S AY I N G

“Until now, governments have tended to ignore pensioners…but pensioners are beginning to take hold of the power that strength innumbers gives them.”Carlo Fatuzzo, Italy’s first and, so far, Europe’s only member of a “Pensioners’ Party” to have won a seat in theEuropean parliament

“The blunt truth is that

the population is aging;

people live longer; and

yet want, unsurprisingly,

the higher living standards

they experienced while

working to continue in

retirement.”Prime Minister Tony Blair, UK

Disclaimer: The views of outside contributors herein are for information, debate, and discussion, and do not necessarily represent official policies of AARP.

“Recent initiatives taken by the European

Court of Justice (Case Danner and Case

Skandia) and the infringement procedures

opened by the European Commission

against eight Member States in accordance

with EU legislation, give us enough hope

that pan-European pension funds will be

a reality sooner than late.”

Martinez-Aldama, head of Spain’s Pension Association, Vice Chairman of the European Federation for Retirement Provision,and Chairman of the World Pension Association

“There’s going to be no such thing as full-time

retirement. There’s going to be part-time

retirement, and part-time work.”

Peter Costello, Australian Treasurer

“We could end up with a workforce

in which there are lots of older

people who don’t want to be there,

doing jobs they don’t want to do,

and for employers who don’t really

want them anyway.”Patrick Grattan, CEO of the Third Age EmploymentNetwork (TAEN)

“It blows me away that we

turn the debate over people

who don’t make enough

money into a debate whether

they can work longer hours

or work longer in their lives.

We should have a real debate

about the aging population,

about making sure there’s

training for young workers,

and, frankly, making sure

people have decent pensions

so they don’t have to work

until their heart stops beating.”

Wayne Samuelson, President of theOntario Federation of Labor

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