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

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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?

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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

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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!

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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?

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“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

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Poor health leads to expectations of retiring earlier

Health and the Retirement Decision

Health and the Retirement Decision

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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