Pension crux

Readers' views No 249, May 2005
OECD Observer

The OECD identifies three fundamental goals of pension reform in the developed world: The reduction of public pension liabilities, the diversification of the sources of retirement income, and the lengthening of working life (No 248, Spotlight on social affairs). While I fully agree with the latter two, I think it is necessary to qualify the first objective.

From an economic point of view, the OECD should be concerned about total pension liabilities, not just public pension liabilities. This is an issue that often creates confusion, and requires clarification: irrespective of ownership, pension liabilities represent huge claims on future economic output. In ageing societies, this represents a big problem, to which governments must find the correct policy responses. But it is a problem that largely transcends the debate about the relative benefits of public and private pension systems, however important that debate is.

The two other proposed goals address the crux of the problem. It seems inevitable, and has been argued thoroughly in these pages, that if people are living longer, and the relative size of the workforce is shrinking, then people will also need to work longer. This will require a big cultural change on the part of both employers and employees (and representative trade unions). But rather than just closing off options to retire early, the OECD needs to encourage governments to erect more attractive regulatory framework for people who delay retirement. It should also direct more effort into identifying the causes of job satisfaction and dissatisfaction, and act on the findings.

The third point about diversifying the sources of retirement income is also crucial. Dependence on one income source (usually a pay-as- you-go public pension scheme) is clearly risky, particularly in an era of globalisation and mobile capital, which may restrain the taxing capacity of future governments. Workers need to increase their savings, and place these savings in well-diversified assets. This is a function that private pension funds seem better placed to carry out than the public sector. Pension funds can also diversify geographically, investing in developing countries with young workforces and high rates of economic growth. This may be the most coherent form of diversification for pensioners in ageing, developed societies.

—Brian McGarry, Economics consultant, Barcelona, Spain

©OECD Observer No 249, May 2005

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