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Raising retirement age: Good or bad?

29 Nov 2020

In the most advanced economies, people commence their working careers with part-time work as young as 15 years old, full-time work as young as 17, and retire only at 65. That’s nearly 50 years of full-time contribution to the national economy. In Sri Lanka’s private sector, the age of entry is as high as 21 for lower level staff and 25 for graduates. Retirement is at 55. Thus, the total contribution to the national economy is only about 30 years. There’s also little part-time work among teenagers, due to a variety of cultural, transportation, and safety-related issues. Sri Lanka’s Government last week announced that the private sector retirement age is being increased to 60. Whatever the reasons for this decision, financial or otherwise, it should in theory result in five added years of service by the average private sector employee to the national economy. Around the world, as medical science has lengthened the lifespans of populations, and general fitness levels as well, countries have increased their retirement ages – some to 65. Thus, Sri Lanka is not alone in this move, and in fact should have done so many years ago.  

Response to the increase in retirement age

The move has been greeted with mixed reactions, very much depending on a person’s or a company’s circumstances and point of view. Some people nearing 55 years who feared not having enough money for their retirement years have welcomed five more years of salaries and five less years of living off retirement savings. Others nearing 55 years who had banked on cashing in their gratuity, ETF (Employees’ Trust Fund), and EPF (Employees’ Provident Fund) are unhappy that they will not be able to do so for another five years. Reasons include plans to set up private businesses; education of children; marriage expenses of children, including dowries and wedding ceremonies. There are fears that keeping older people for five more years will cause an unemployment crisis for youths who won't have enough job openings. In particular, parents of youngsters of the age where they are trying to enter the job market are fearful; so are some youths. Some employers aren’t happy. At present, they can make people retire at 55, hire them on contract for very little money only if necessary for the company, and don't have to pay for gratuity and EPF for the extra years. Other employers who don’t have strong cash reserves are happy that they won’t have to pay gratuity for retiring employees for five more years. The Government is happy in the short term because the EPF Board and ETF Board don’t have to pay retirees for another five years. Given the financial scandals and extraordinarily bad investments that the EPF and ETF have made over the past couple of decades, this is a welcome relief for them.  

The global experience

So what's the global experience? When other countries increased the retirement age, what happened? Is it so much of a problem? Or is it a positive move? In the aftermath of the global financial crisis, several countries took steps to strengthen their pension systems’ financial sustainability. The majority of pension reforms over the last two years have been focused on relaxing pension age standards, increasing pension benefits like first-tier pensions, widening coverage for pension benefits, or stimulating private savings. Increasing the effective retirement age has generally eased the burden on the elderly. If retirees are working later into their lives, it increases their production levels, thus raising the available resources to consume, even if older people are on average less productive than young people.  More tax (including social security contributions) will also be charged on working wages, thus strengthening public finances. But, people will invest less than in the short retirement period because they need less wealth, and lower savings will decrease the ratios of capital, efficiency, and real pay. Delaying retirement would therefore increase the wage base by which social security contribution is measured for higher jobs, but would reduce in terms of the decreased real wage rate.  Therefore, there may be a very limited net long-term effect of delayed retirement on the increase in payroll tax payments. But such model success depends strongly on the underlying life-cycle saving hypothesis, which entails a significant demographic impact on the private economy. There are no ties or clear correlations between countries’ retirement age, life expectancy, and private savings, or between changes in those factors. Although, this doesn't demonstrate that saving is not impacted by the retirement period, because other missed factors may have outstripped such consequences. The long-term retirement period does not, however, play a role in savings, efficiency, and real wages.  

Global context

Early retirement in many OECD (Organisation for Economic Co-operation and Development) countries has become more normal in recent decades. This pattern would not be a policy issue from a welfare point of view, as it primarily represents higher income and higher desires for leisure. Earlier work by the OECD found that the institutional establishment of pensions and other compensation schemes that allowed people to leave the labour market at a relatively young age was responsible for this development. Such distortions in decision-making in respect of labour are problematic because they decrease labour, productivity, and living standards. With ageing demographics, the issue will increase even more as more people will be impacted by these distortions in the relevant age groups. The retirement age of men and women has been raised to 65 years by developed countries such as the US, Germany, and the UK. In India, the retirement age in the private sector is around 58, and it is 60 years in the government sector. Fig. 1 shows the global scenario.  

Singapore

While the pension age is currently 62, employers are required to provide “rework” to eligible workers up to age 67. Pension and re-employment ages will grow to 63 and 68 years, respectively, by 2022. However, the Prime Minister encouraged employers from the private sector to join the public sector in keeping with the new retirement ages of the year 2021; Pension and re-employment ages will be lifted to 65 and 70 years, respectively, by 2030. Increased CPF (Central Provident Fund) contributions will begin in 2021 for workers over the age of 55. Currently, contribution starts to taper at the age of 55, but the Government is planning to increase it to 60 years in approximately 10 years. Employees can also withdraw money from their CPF account from the age of 55 years and collect CPF pay-outs from the age of 65 years.  

Malaysia

The Government proposes by law that workers in the private sector should have an obligatory minimum retirement age. In applying a mandatory minimum retirement age, the Government has as its rationale the following: 
  •         The average life expectancy rises to 75 years and the population is currently rising at 7.8% and is projected to hit 15% by 2030
  •         Failure to save EPF, as 75% of EPF members saved less than RM 50,000 at 54 years of age
  •         Enhance the network of social security for workers, especially vulnerable groups
  •         To be equivalent to other countries with pensions of 60 and older in the region
  •         Reducing the Government's responsibility of providing medical and social care for the elderly
  •         Ensuring fair work opportunities regardless of age
  •         Enhancing the pool of quality jobs by increasing professional and skilled workers' facilities
 

Assessing the supply and demand side

Demand side The demand side of the job market sees a decrease in the hiring rate of senior applicants, since the limited jobs timeframe (short-term agreements) for such workers reduces productivity and minimises them monitoring. The fixed costs facing an organisation when hiring also decrease the hiring rate, particularly because senior employees have more human capital to boost when they are starting a new job. Companies often have little chance of recruiting senior employees relative to junior workers, as the productivity for the applicant is always decreasing by age. The essence of this argument is that recruiting a top candidate (senior) with a high salary but a potentially high level of productivity is less desirable to the organisation than hiring a junior applicant with a lower salary and lower productivity.   Supply side On the labour market side, seeking senior employees (whether currently working or unemployed) will obtain labour supply in light of the potential loss of compensation for shifting employers (by losing firm-specific human capital), structural rules, and constraints on opportunities outside the labour market. Due to lower dominance of new job search techniques, the digital age of job search efficiency (for instance online job portals) contributes to decreasing work search effectiveness among workers of a senior age, which results in a low optimum job search effort. Moreover, the closer an unemployed senior person is to retirement age, the lower the optimum job search effort is due to the decline in planned retirement benefits.   Reduced cost Costs for businesses will tend to decrease until this pensioner community has vacated the jobs. Younger employees will incur less than the cost of recruiting pensioners in the areas of e-commerce, ICT (information communications technology), and other high-end services. Take the financial sector, for example. Although retirees can leave, the recruiting of skilled people in new banking areas such as fintech can cost more. A change in the demographic trend would impact potential fiscal pressures in tandem with an increased number of pensioners in both the public and private sector and longer life expectancy.   Ageing population  It is important to take into consideration the age statistics and trend of the population before making decisions on retirement ages. Sri Lanka also has a wide number of people 65 and older who constitute 10-11% of the total population. Despite these challenges, low birth rates and an ageing population mean a higher proportion of dependence where younger generations have to support the elderly. Since the compulsory retirement age is 60, the withdrawal of the EPF remains at 55. The aged population could also mean that the dependency ratio, which calculates the number of dependents, will start to increase, and that may be a greater burden on the economy at the macro level. In 2020, Sri Lanka had an unemployment rate of around 4.18%. Another key aspect to consider is the change in life expectancy. In 2018, women's life expectancy was approximately 80.12 years in Sri Lanka while men's life expectancy at birth averaged around 73.42 years.    Productivity Older people in an organisation may still play an important role. They can have a dual role; while also helping mentor and train younger people and continuing their regular activities. The abundance of information from their experience is an underutilised valuable advantage for businesses as they will continue to make a major contribution to the growth of younger people through knowledge transfer. However, it may have a detrimental impact on attempts to raise the retirement age in the incredibly bloated private sector.    Social impact What do Sri Lankan retirees spend their money on? Fig. 6 gives an evaluation.  

Key takeaways

The Government must make a thorough evaluation of the negative impact of 55-year-olds continuing in companies and not ploughing their EPF and gratuity into new SME (small and medium enterprise) ventures in the economy. This may dent GDP growth at a critical post-Covid time. The Government needs to re-evaluate and strengthen medical and welfare services for retired persons, now that retirement is to be 60 years. They should guide the public on the best way to invest and utilise retirement savings, keeping in mind cultural and family requirements such as weddings and educating children. The Government must ensure the interests of marginalised labour sub-populations with a constructive retirement reform to protect the rights of older workers. Drastic negative impact and disruption of life plans such as children’s education from the raising of the retirement age should be avoided by allowing employees between 50 and 55 to retire at 55 and withdraw their EPF, ETF, and gratuity.   (The writers are Managing Partners of Cogitaro.com, a consultancy that finds practical solutions for challenges facing society and different industries. Dr. Dias is a digital architect and educationist based in Kuala Lumpur. He holds a BSc in Computing from the University of Greenwich, a Master’s in Computer Software Engineering from Staffordshire University, and a PhD from the University of Malaya. He is completing a second doctorate in Business Administration from Universiti Utara Malaysia [ruwan@cogitaro.com]. Eliatamby is a lecturer in marketing, human resources, and mass communications based in Colombo. He is an author and was formerly associate editor of a newspaper and editor of various industry magazines. He holds an MBA from London Metropolitan University and an LLM from Cardiff Metropolitan University [niresh@cogitaro.com])


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