/ 26 July 2009

Lowering pension age ‘is a risky business’

It is surprising that South Africa has reduced the retirement age for men qualifying for the social old-age pension to 60.

It is surprising that South Africa has reduced the retirement age for men qualifying for the social old-age pension to 60, says Ole Settergren, of the Swedish ministry of health and social affairs.

Settergren was invited to South Africa by Sanlam to discuss Sweden’s experience with pension-fund reform. Interviewed by the Mail & Guardian, he said South Africa’s move on retirement goes against the global trend of increasing the retirement age as longevity starts to place an increasing burden on the taxpayers who are funding pensioners’ income. It is almost impossible for taxpayers alone to fund the retirement needs of pensioners for 30 or more years.

Although South Africa’s life expectancy has fallen to below 50 because of HIV/Aids, statistics show that once a person has reached the age of 60 the pandemic is no longer a major risk factor and longevity becomes the primary risk for retirement funding.

Policymakers have argued that lowering the retirement age for men to match the women’s retirement age of 60 opens up employment opportunities for younger people. But Settergren says this is a very dangerous game. In fact studies have shown that there is a positive correlation between employment and higher retirement ages.

In countries such as the United States, Britain and Ireland, where the retirement age is higher, the levels of unemployment are among the lowest in the world.

By comparison countries such as France, Belgium and Italy, which have low retirement ages, have low employment rates.

Settergen argues that a state-funded pension is a poverty alleviation measure which is meant to supplement income when one can no longer work. Taking productive people out of the economy is counter-intuitive to this policy.

He maintains that South Africa should instead focus on removing the means test for state pensions as the test creates perverse incentives not to save for retirement. South Africa could fund this universal approach by increasing the age of retirement for both men and women to 65.

While Settergren makes a valid argument, there is a social dynamic to pensions that would not apply to developed economies. Female pensioners in particular use their grants to support grandchildren who have often lost parents to HIV/Aids. Many of them are not employed and delaying the grant payment by five years would inflict hardship on these families.

But when policymakers look at the creation of a national social security fund they should consider making 70 the age of retirement. This would lower the burden of pension contributions required and provide for the risk of longevity.

Considering how far we are from the implementation of such a fund a decision about retirement age sooner rather than later would allow economically active people sufficient time to adjust their expectations.

Settergren says, he would prefer to work longer and have more disposable income. Swedes save about 30% of their income for retirement and there are concerns that this may not be enough.