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Transcript of The Age of Retirement Professor Kevin Davis Research Director Australian Centre for Financial...
The Age of Retirement
The Age of Retirement
Professor Kevin DavisResearch Director
Australian Centre for Financial Studies
Round TableOutline
Outline
• Why older official retirement ages (ORA) globally?• What is the underpinning philosophy/ideology?• What role does ORA play in retirement decisions?
– v Health, Employment Opportunities, Super Access
• What follows “retirement” ?– health, mortality, work, financial considerations
• So: who wins, who loses from an increased ORA?• Policy considerations
Round TableORA Trends – OECD Average
ORA Trends – OECD Average
60
61
62
63
64
65
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Pensionable age (years)
Men Women
Source: OECD, Pensions at a Glance
Round Table
Demography– Increased dependency ratios (retirees/workforce)– Increased longevityLeading to
Government Budgetary Issues– Increased age pension / social security costs– Increased health costs etc
ORA Trends - Reasons
ORA Trends - Reasons
Round Table
Remaining Life Expectancy: Changes over time
0
10
20
30
40
50
60
70
80
90
At 0 At25
At45
At65
At 0 At25
At45
At65
Males Females
Yea
rs
1881–1890
1920–1922
1953–1955
1985–1987
2007–2009
Round TablePhilosophy and Ideology
Philosophy and Ideology
• Australia – age pension an annual entitlement– At designated age, Irrespective of years worked, unrelated to life
expectancy, “use it or lose it”
• Internationally different approaches– USA – some flexibility in access to social security, related to years
worked/contributions, some actuarial fairness – start earlier, get less p.a.
• Explicit “tax” contributions v General Budget Funding– How does this affect the thinking about equity issues?
Round Table
Individuals could be eligible for the age pension– At same age for all– After some specified number of years in work force– At age linked to expected remaining lifetime– At age of their choice (with implications for amount received)
Amount of age pension could be– Unrelated or related to prior tax contributions
• Eg USA social security contributions– Actuarially fair or fixed annual rate
• “Fairness” - Later age of access implies higher annual rate– Dependent or Independent of personal wealth
• NZ – independent; Australia – related to some components
Some Alternative Approaches
Some Alternative Approaches
Round Table
Individuals calling themselves “retired” may be– part of the hidden unemployed– in receipt of disability/health benefits– no longer in long term career occupation, doing other work– Over ORA and receiving pension/drawing down savings
Many retirees over ORA subsequently become “unretired”: re-entering workforce for some period– USA: estimated at around 25 per cent– Australia: around 10 per cent in 2007 (ABS)
• 310,000 former retirees in workforce v 3.1 million retired• Main reasons: financial need (36% males, 42% females), bored (32%
males, 14% females)
What is retirement?
What is retirement?
Round TableRetirement Intentions
Retirement Intentions
Retirement Intentions 2010
60.0
62.0
64.0
66.0
68.0
70.0
72.0
Age
Inte
nd
ed
Re
tire
me
nt
Ag
e Males
Females
“Optimistic”but consistentwith recentexperience
Round TableAverage Effective Age of Retirement: Men
Average Effective Age of Retirement: Men
56.0
58.0
60.0
62.0
64.0
66.0
68.0
70.0
72.0
74.0
1970 1980 2000 2011
Japan United States Australia Denmark Greece
Source: OECD
Reversal of trendor GFC effect?
Round TableAverage Effective Age of Retirement: Women
Average Effective Age of Retirement: Women
54.0
56.0
58.0
60.0
62.0
64.0
66.0
68.0
70.0
1970 1980 2000 2011
Japan United States Australia Denmark Greece
Source: OECD
Round TableRetirement Reasons
Retirement Reasons
• other determinants not shown including timing of retirement to coincide with that of partner, pursuit of leisure/holiday activities, etc. are more important for females
• caring for others was relatively more important within the health/family reasons category for females.
Round TableRetirement: labour market influences
Retirement: labour market influences
76.4 73.4 75 78.4
54.6
12.6
8391.8 91.6 88.8
71.9
24.5
20–24 25–34 35–44 45–54 55–64 65–74
2010-2011Females 2010-11 Males 2010-11
77.370.8 71.5 71.2
38.3
5.9
85.991.4 91.4 87.8
61.4
15.2
20–24 25–34 35–44 45–54 55–64 65–74
2001-2002Females 2001-02 Males 2001-02
• Participation much lower for 55+ group “early retirement” due to:• Health• Redundancy and lack of suitable skills for alternative jobs • Implicit age discrimination in hiring• Financial security
Workforce Participation rates
Round TableCumulative Change in Industry Employment (000’s) Feb 2005- Nov 2012
Cumulative Change in Industry Employment (000’s) Feb 2005- Nov 2012
Changing employmentpatterns and technologicalchange – problems forolder workers!
Round Table
Age relative to expected retirement age is a predictor of workforce participation
Increasing ORA likely to increase actual retirement age– Direct effect – need to work longer to access pension income– Indirect effect – less employer resistance to employing older
workers (due to longer expected tenure)– Psychological effect – ORA is “reference” or “anchor” point
influencing individual perceptions of “normal” retirement age• And policy statements which emphasize early retirement as losing future
benefits (of higher retirement savings) rather than later retirement as increasing future benefits may have more impact on decisions.
Does the ORA affect early retirement decision?
Does the ORA affect early retirement decision?
Round Table
“Rational” retirement decision compares cost of working longer with additional retirement wealth– Increase in ORA encourages continued working due to further
distance from accessing pension income• Same effect from increasing the preservation age for superannuation
access– Means testing of pension income discourages continued
working (to the extent that additional savings reduces pension income)
Do tax incentives play a role?
Do tax incentives play a role?
Round TableDoes the Preservation Age (PA) Matter?
Does the Preservation Age (PA) Matter?
• Access to super clearly a determinant for retirees from age 55 onwards– PA = 60 for those born after July 1 1964
• Tax free withdrawal above age 60• “Transition to retirement” from 55 and earnings
taxfree• 1/3 of super drawn down before age 65 (Tax Review
– Retirement Income Strategic Issues paper)
Round TableDoes the PA Matter?
Does the PA Matter?
• 50+% of age group 50-60 state reaching PA is an important factor determining retirement intentions in 2003 HILDA survey, more than for reaching ORA (Felmingham et al, 2006).
Round TableTax & Pension Incentives to Retirement
Tax & Pension Incentives to Retirement
• “the Australian retirement system does provide an incentive to retire early. However, men are much more likely than women to respond to these financial incentives.” Warren & Oguzoglu (AER, 2010)– Particularly for men between 60-64– Financial incentives for women have little importance– Based on “How much does extra year of work increase expected total
lifetime retirement income versus disutility of work?”– Increasing retirement age reduces incentive to retire early – and
creates “new normal” expectations.
Round Table
Varies across countries– Around 15% in USA, Canada, Denmark, Japan, Norway– Much higher in continental Europe
Higher in high unemployment periods Labour market policies relevant (job security policies
arguably affect willingness to hire older workers) For Australia – 27% if defined as: laid-off, left job for
medical reasons, or self employed business closed (Barrett & Brzozowski, 2010)– 40% if definition includes left job for non-retirement reason
How much early retirement is involuntary
How much early retirement is involuntary
Round Table
Poor health leads to expectations of retiring earlier
Health and the Retirement Decision
Health and the Retirement Decision
Round Table
Involuntary v voluntary retirement crucial– Decline in grocery expenditures for those involuntary retirees,
but not for others (Barrett & Brzozowski, 2010)– Reduced financial and life satisfaction for involuntary retirees,
but slight increase in life satisfaction for others Retirement as a determinant of mortality
– Positive/Negative - Literature provides no definitive guidance• Studies using changes in ORA (and thus actual retirement age) for
different groups can control for health influences on actual retirement etc• No apparent relationship in a recent study using Norwegian data (Hernaes
et al, 2012) “mortality considerations should not have a prominent place in policy considerations of the retirement age”
Post retirement outcomes
Post retirement outcomes
Round TablePost Retirement outcomes
Post Retirement outcomes
• Significant increase in older age home-owners with a mortgage (30.7% of 60-64 age group in 2010 v 16.5% in 2002) - Kelly Report” for CPA Australia.
• Assets test incentive to invest in higher value housing and use super to pay-off mortgage– How significant?
• Use of higher leverage to fund pre-retirement lifestyle– How significant?
Round TableConclusions – Policy Issues
Conclusions – Policy Issues