8 July 2021

Forget the triple lock, why not scrap the retirement age?

By Kiara Taylor

Rishi Sunak is rumoured to be considering scrapping the ‘triple lock’ in order to avoid handing pensioners an 8% pay rise. The pandemic has caused a dramatic fluctuation in earnings, which could mean the Chancellor has to stump up an extra £3bn unless he breaks a manifesto pledge. But it shouldn’t take a single statistical quirk for the Government to realise that pensions need reform.

Life expectancy has been increasing for decades while the retirement age has stayed the same. This means the state is supporting ever more retirees for many more years, with the working age population shouldering the burden. So perhaps as well as thinking again about the triple lock, Sunak should be looking at what other countries are doing to extend people’s working lives.

An age of controversy

It was the Germans who, in 1881, began to push the idea of a state-sponsored mandatory retirement program. Chancellor Otto von Bismarck argued for mandatory retirement at age 70 coupled with support payments from the state. This was not a tremendous stretch as life expectancy in Germany at the time was around 70 as well. The UK followed suit in the early 1900s, setting a retirement age of 70. 

Since then there has been little attempt to tie retirement age to life expectancy, yet most people still expect to be able to stop working at around 65. Although arbitrary, attempts to change the retirement age have proved difficult.

For instance, French President Emmanuel Macron proposed increasing the retirement age from 62 to 64. The result was a series of large-scale and often violent demonstrations by the gilets jaunes across the country. Although pension reform was beginning to gain momentum, the economic shutdown resulting from the Covid crisis caused the French government to reconsider the scope of its plans.

In 2011, Italy increased its retirement age to 67. Years of backlash caused a partial course reversal. In 2019, Italy introduced a new early retirement policy allowing workers to retire beginning at age 63 if they have contributed to the retirement system for at least 36 years.

In 2018, Russia attempted to divert attention from drastic increases in the minimum retirement age (men going from 60 to 65 and women from 55 to 63) by announcing the changes on the first day of the soccer World Cup being held in the country that year. Large protests led President Putin to seek a reduction to age 60 for women only.

However some countries have had more success. Two years ago, Sweden made a series of phased changes to its retirement system. But the innovative change Sweden implemented was to begin defining a “benchmark age” tied to life expectancy that would serve as the basis for all future increases. 

Thus, as life expectancy increases, retirement age will increase accordingly, at a rate of two-thirds of the life expectancy increase using a six-year delay. To avoid too much disruption to the working populace, retirement rate increases will only occur every three years, although Sweden will calculate the benchmark age annually.

Estonia has also decided to pursue a benchmark approach. In 2027, retirement age will link to the life expectancy of 65-year-olds two years prior. Retirement age can not increase more than three months at one time.

Other countries such as France, Germany, Finland and Poland use life expectancy to adjust benefit payments rather than adjusting retirement ages. While tying retirement ages and benefits to life expectancy may sound like an entirely logical and rational approach, the OECD has questioned its validity due to uncertainties in calculating life expectancy.

Interestingly, Japan – which has both a labour shortage and one of the world’s oldest populations – is considering abolishing the retirement age altogether. 

In a world where many people remain fit and healthy well into their 70s, and where the President of the United States is almost 80, the concept of mandatory retirement is questionable. Why should older people who want to work and are capable of doing so be forced to retire?

New models of working precipitated by Covid and the advent of the gig economy also present older workers with more opportunities to continue working past retirement age. In Europe, more than 14% of freelancers are over the age of 50. Older Americans have taken even more advantage of the freelancing boom, with 26% of US freelancers being 55 or older.

As demographics continue to change and more older workers require support from fewer younger workers, new and innovative approaches to retirement will be necessary. Both workers and governments will have to compromise. But retiring the retirement age would be a good start.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Kiara Taylor is a financial journalist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.