Columns - The Sunday Times Economic Analysis

Extending the retirement age in an ageing economy

By the Economist

Change is an extremely difficult proposition in Sri Lankan society. Economic and social policies tend to remain static even though society and the economy may have changed. This is the reason why reforms in many areas have hardly been attempted or when they have,the opposition to these are too strong and consequently governments change their minds and withdraw to the status quo ante. The opposition to reform comes from many sources. Those who do not understand the issues involved are among the first to oppose change. Political parties tend to oppose changes attempted by the government for political reasons and opportunism. Ideological factors and belief systems are other important reasons. Administrative reforms, health sector reforms, educational reforms and constitutional reforms, inter alia, have suffered such fate and remained unimplemented. Consequently Sri Lanka’s institutions and economic and social policies tend to remain unchanged and be much in need of modification and reform for a society that purports to achieve rapid economic growth.

In such a context it is most likely that the proposal to extend the retirement age would meet with opposition from many quarters. The most popular argument against this reform would be that it would deny employment opportunities to the young. This does have some validity but this argument is an exaggerated one. The amount of employment lost to those youth seeking employment would be negligible. Besides this in a country where employing youth in the public services is not on a rational basis, the amount of such loss is inconsequential. The fact is that the extension of the retirement age is indeed a necessary step in the context of the emerging scenario of an ageing population. Other countries facing a similar ageing population have in fact taken steps to extend the retirement age and in some developed countries given up the requirement of a retirement age completely. The reasons for extending the retirement age are indeed many. Sri Lanka’s population is ageing fast. By the middle of the 21st century persons over 60 years of age may constitute about half the number between the ages of 15 and 60. The old age dependency ratio will increase from about 15 per cent at present to 30 per cent in 2021 and as much as 46 per cent in 2041. The current life expectancy of 72 years is expected to rise to 78 years. What this means is that on average a person would live 18 years after retirement.

The ageing of the population has serious implications for retirement benefits. One problem posed by ageing is its effect on the viability of pension schemes. While there is a general inadequacy of pension benefits after retirement, the pension schemes in operation would have to pay out monthly pensions over a longer period of time. Consequently the burden of the retirement benefits on employers would be heavy. This issue is particularly significant for the public service pension scheme. Although the issue of viability of the government pension scheme does not arise as the payments are not paid out of a pension fund, the cost on the annual budget would tend to escalate as retirees live for a longer period. Therefore, there are serious consequences of ageing on the public finances of the country. According to one study, government pensions could absorb as much as 20 per cent of expenditure in the future. This would distort the public expenditure pattern with priorities in spending being distorted and lesser funds available for public investment and economic growth.

Pension schemes especially of public servants do not adequately cover the expenditure needs of the elderly at retirement. This problem is aggravated now by the high rate of inflation. The country’s high inflationary trends erode the real value of pensions as well as the value of savings. The ageing of the population compounds the severity of this erosion in real incomes of retirement benefits. With a longer span to live after the employed period, the strain on income resources would be quite severe. The longevity of life implies that the real incomes available in the later years of a retired person’s living would be inadequate. This is particularly so as expenditure on medicine, drugs and hospital expenditures are high and subject to sharp increases in prices. The extension of the retirement age would mitigate this problem as well as reduce the financial strain on pension funds. The issue of retirement benefits is related to the employment life span of Sri Lankans.

The retirement age of 55 years for men and 50 years for women in the public service, with a possible extension of another 5 years, was designed at a time when the country’s life expectancy was around 55 years. With the current life expectancy of over 70 years and an expected increase in life expectancy, there is little justification for retaining the current retirement age of 55 years.

The extension of the retirement age may be one means by which the burdens of the pension scheme could be reduced. It could also improve the livelihoods of the retirees.

An imaginative suggestion is phased retirement. Instead of persons retiring at once on reaching the stipulated age of retirement, the number of days of work could be gradually reduced from 5 to 4 days of work per week and then 3 and 2. The employees would begin to draw a partial pension at first and the full pension at full retirement. Such a phased retirement enables institutions to benefit from experienced staff, while at the same time recruiting new staff. However the implementation of such a scheme in Sri Lanka would be more difficult than even a simple extension of the retirement age.

It is left to be seen whether this proposal would be ultimately implemented. Those opposing may have to consider the fact that the ageing population of the country means that the vote of the elderly would have a higher weightage than in the past. Therefore they would have to reflect on the advantages and disadvantages of opposing the scheme of extending the retirement age. Irrespective of such political considerations, it is an economically rational move to increase the country’s retirement age. It may be logical to raise the retirement age of the public service to 65 years and those of other institutions like universities that have a retirement age of 65 to raise it to 70 years.

The ageing of the population brings about a host of other issues that should be addressed besides the retirement age. These include the care of the elderly and reform in the health sector to cope with the emerging pattern of illnesses. We expect to deal with these issues in next Sunday’s column.

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