iMFdirect
February 1, 2012
Indiana Jones, the fictional character of the namesake movies, once said “It’s not the years, it’s the mileage.” This quote comes to mind as many advanced economies wrestle with pension reform and the best way to ensure both retirees and governments don’t go broke.
Our view, explained in a new study, is that the years do matter.
Our analysis shows that gradually raising retirement ages could help countries contain increases in pension spending and boost economic growth. Further cuts in pension benefits, or raising payroll contributions, are also options countries could consider, although many countries will find many advantages in raising retirement ages.
The challenge is to reform pension systems without hurting their ability to provide income security for the elderly and prevent old-age poverty.
Pension Reform and Fiscal Consolidation
Pressures from aging populations and increases in pensions—relative to wages— have pushed public spending in this area from 5 percent of GDP in 1970 to 8½ percent in 2010. Pension spending now accounts for about a fifth of government spending. Higher pension spending has helped alleviate old-age poverty in many countries, but has also put pressure on public finances.
The level of pension spending a country should aim for is ultimately a question of public preference. However, since many countries need to reduce government debts and budget deficits, most big-ticket public spending categories, including pensions, will need to be part of countries’ fiscal adjustment strategies. This is particularly important in countries where pension spending will continue to rise under current policies.
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