The retirement age should be 80
There are things that are logically true and yet somewhat difficult politically. This is just another of those reasons why we’re not wholly enamoured with politics as a way of running things.
Denmark has the right idea here:
Denmark will raise its retirement age to 70 by 2040, the highest in Europe, after a controversial vote in parliament.
The increase in retirement age was approved in the country’s legislature, with 81 votes in favour and 21 against.
The age of retirement has been tied to life expectancy in Denmark – currently 81.7 years – since 2006, with the government raising the threshold every five years.
If life expectancy keeps rising then yes, something does have to give. Either the tax burden upon those still working has to keep rising or the number of years spent in retirement has to start falling. Or, the only third alternative, the state pension approaches being worth spit.
Our favourite explanation of the underlying here comes from Brad Delong. It is logical that we spread our incomes over our lifetime - the lifetime savings hypothesis. We save while we are working in order to pay for ourselves when we are not. But that clearly faces some uncertainty - how long will we live and therefore how much do we need to save? The answer is that, logically, we should save for how long we expect to live. As that’s somewhat hazy saving for the average lifespan of the previous generation is the best we can do.
That we’ve been doing this is what explains that horror that Thomas Piketty uncovered. Wealth, capital, to GDP has been rising this past 80 years or so. From perhaps 300% of GDP to say 500%, 600%. Piketty says this is a return of feudal societal relations. The numerate point out that lifespans have gone from perhaps 3 years in retirement to maybe 15 (on average) and we’ve a rise in perhaps 200% of GDP in pensions savings to pay for it. Ho Hum.
But that still does leave some 50% of the population outta luck. For a very reasonable expectation is that 50% of this generation will outlive the median lifespan of the previous. It’s almost just statistics that, maybe even just maths.
So, if rational lifetime savings still leave 50% of the population shopping in the cat food aisle for their meat that’s the point at which the societal protection of the welfare state should step in. The state pension becomes the compensation to have lived long enough to have exhausted your rational savings. This also means that the state pension age is about 80 now, the median age at death of the most recent generation we’ve the full numbers for.
This then reduces that inexorably rising tax bill on those still working. It also enables us to raise the amount of the pension to something to fully live upon.
What anyone wants to do with their working lives and their own savings is, of course, wholly up to them. This is about when others have to start chipping in, nothing more.
That is indeed wholly logical. It’s also entirely impossible politically. But the Danes are accepting the base logic and moving in the right direction all the same. Which does lead to a thought. Yes, Denmark has a larger welfare state than Britain. It’s also possible to muse that the Danish welfare state works - possibly but not conclusively proven perhaps. One potential reason for that being that the Danes are remarkably unsentimental about that welfare state. Raise the pension age. If you’re unemployed then benefits are very generous as are the retraining opportunities. But if you don’t shift yourself and work at getting that next job after two years you get nothing. And so on - perhaps unsentimentality is a necessary precursor to a welfare state?
Tim Worstall