Undercover Economist

It’s time to stop being shy about retiring – we can’t afford it

If 80 is the new 60, and 50 is the new 30, I’m a teenager again, looking forward to a bright future at university. I certainly had a thought-provoking tutorial recently at the hands of UBS’s professorial George Magnus, one of the prophets of the credit crunch but also the author of a book about demographics, The Age of Aging.

The statistics about an ageing population are starting to become familiar: people are living longer and having fewer children, and this is true not only in rich countries but much of the developing world. But the implications are often misinterpreted. An ageing society is not, primarily, a demographic crisis. The problem is a failure to adapt – a failure that afflicts politics, management and society.

The simplest way to see this is to think again about what the demographic “problem” is supposed to be. It is simply that people are tending to live longer and longer, often in good health. That doesn’t sound like a problem to me – are we supposed to prefer a world in which people die younger and younger?

But our institutions are adapting too slowly. Too many companies rely on a seniority system that, if not “dead man’s shoes”, is certainly “retired person’s shoes”; such systems struggle to deal with employees who no longer deserve or want the top jobs, but who could still be employed at a more “junior” rank. Final salary schemes, still popular in the public sector, amplify the problem, with their presumption that the final salary will also be the highest salary that a worker ever earns. The law offers no help: mandatory retirement on the sole grounds of age remains perfectly legal in the UK. Speaking as someone who once shared an office with an inspirational mentor more than 50 years my senior, I can affirm that on this point, the law is an ass.

Then, of course, there are state pensions, which are still paid out on the basis of age rather than ill-health, and at ages that have not risen to keep pace with our longer lives.

When Bismarck introduced the world’s first state pension, 120 years ago, it was payable from the age of 70; few men would have lived long enough to collect it, although Bismarck himself was 74 at the time. Now, it is not unusual to collect a state pension for 20 years. Several countries are increasing the state pension age – most recently, Australia – but very slowly.

Much ink has been spilt over the question of financial sustainability: have we saved enough into our personal pensions, have our employers properly funded our final salary schemes, and has the government got enough money to pay state pensions in the future? All distractions, because no amount of financial engineering will solve the underlying economic problem of a small number of workers trying to support a large number of retirees. There are really only two solutions: we consume less, or we settle for a longer working life.

If retirement were not hedged about by an institutional thicket, these solutions would arrive without much fuss. Faced with labour shortages, companies would raise wages; meanwhile, as a large cohort tried to retire together, the price of houses and shares would fall, while annuity rates would also be miserly. Working a little bit later and enjoying slightly less of that long, long retirement would become a very tempting offer.

I sympathise with state and corporate paternalism in the world of pensions, because thinking on a 50-year timescale and coping with complex investments are two areas where our enormous brains often seem to let us down. Yet if these helping hands simply push us into premature retirement, we will have little reason to be grateful.

Also published at ft.com.