INDIA: Higher or lower retirement ages?

OKONOMOS: Comment by T C A Srinivasa-Raghavan NEW DELHI (Business Standard), December 14, 2007: A compulsory retirement age makes little sense. It should be linked to benefits and other things. About 15 years ago, the proprietor of the newspaper I used to work for then asked me, very earnestly, what my long-term career goals were. I told him, equally earnestly, that I wanted to maximise leisure. My target for retirement, I further told him, was 45 years. He wasn’t very pleased, considering I was just about 42 years old at the time. Happily, helped by technology, I succeeded in achieving that target in the sense that I untied myself from the tyranny of an office. So, although I work a lot now, I do so on my own terms because I do not believe that merely going to the office equals work and, conversely, not going to office equals retirement. Now three American economists from Harvard, David E Bloom, David Canning, and Michael Moore, have written a paper* called A Theory of Retirement. “The results of our model can serve as a benchmark in the design of public pension systems,” they say. India can surely learn from this because of the huge pension liabilities that it is going to face, not just in terms of the number of retirees but also in terms of increased life expectancy. (The latter is especially true of India’s government employees who live long after retirement because of the relaxed, unstressed life they lead while employed by the government.) Even though honest Indians disagree with the definition the authors use because it confuses mere employment with work, it is useful to summarise the findings. These are two. Their first conclusion is that “at higher levels of lifetime wages, the desire for increased leisure leads to early retirement funded through a higher savings rate.” Their second, and final, conclusion is that “longer life spans and healthier lives lead to higher consumption and lower savings rates,” but that these can be “consistent with a less-than-proportional increase in working life.” Their analysis is based on the finding that whereas 80 per cent of Americans over the age of 65 used to work in 1850, only 20 per cent do so now. This is because of the increasing level of wages over the last 150 years, or, which is the same thing, increasing productivity. The point that emerges is simple: if you earn more when you are working, you can save more, and so retire earlier if you want to, provided the capital markets are sufficiently well-developed for you to be able to convert a portion of your current earnings into a stream of future earnings that more-than-neutralise for inflation. For India, more than anything else, this is the main case for financial sector reform. This paper triggers another thought: should India encourage employees to retire earlier, rather than later, as the new Pay Commission is likely to suggest? This is because while raising the retirement age may take care of the skills shortage for a while now, in the long run it will leave employers with a higher, and eventually unsustainable, pension bill. The paper offers an interesting insight in this regard, which the Pay Commission can cite in support of raising the retirement age. Often, if not always, it says sustainability problems are tackled by increasing contributions and reducing benefits. But the paper suggests the opposite. “…The optimal response should be to reduce contribution rates and increase benefit rates, maintaining solvency exclusively by increasing the age of retirement, though this age can rise less than proportionately with life expectancy. This response can maintain solvency because rising wages over time and compound interest on accumulated savings mean that longer working lives tend to create more than proportionately higher wealth at retirement.” * A Theory of Retirement, NBER Working Paper No 13630, November 2007 Business Standard Ltd. Copyright & Disclaimer