- As more people live longer, retiring at 60 or 65 means that some are running out of money at retirement.
- But working a little longer and abolishing the retirement age could solve this.
- The lead author of the Mercer CFA Institute Global Pension Index says it's time to overhaul the retirement savings system because it doesn't work for many any more.
The lead author of the Mercer CFA Institute Global Pension Index says it's probably time to rethink the concept of retirement age.
Whereas retirement is often sold using pictures of people sailing their yachts on pristine ocean water, the reality is that more and more people, especially in the developing world, battle to make ends meet at retirement. In South Africa, fewer than one in ten people who were formally employed save enough to retire comfortably.
David Knox, the lead author of the Mercer CFA Institute Global Pension Index, thinks the rigid system which assumes that people will work and save for retirement uninterrupted for 40 years is clearly not working for everyone.
In Australia, where Knox is based, there is no official retirement age.
"We have an official state pension age so that if you're poor, you can get a pension from a certain age. But there is no retirement age," he said during Allan Gray's first retirement benefits conference on Thursday.
Of course, there has to "gradually retire people" to make way for young people to move into those jobs, said Knox. But he said if the government wants to encourage people to take up some work beyond the age of 60 to sustain themselves instead of depending on the state if they can't, he said they should think about "removing the retirement age altogether".
"We are not suggesting people have to work as compulsorily over the age of 60 to 65. But if you work a little bit longer, not only can you save a little bit more, but you're shortening your retirement years," added Knox.
Bring the gig economy under the retirement net
The other reason Knox thinks the world needs to overhaul the pension system is because an increasing number of people don't work full-time salaried jobs, as was the case when the idea of retirement savings was first conceptualised.
The rising number of people participating in the gig economy don't enjoy the retirement fund membership that full-time employed people do. The current system also leaves self-employed individuals to their own devices when it comes to choosing whether they want to buy retirement annuities or not. The argument has always been that entrepreneurs build businesses that they will one day sell and live off the proceeds in their golden years.
"Well, I'm sorry, but most self-employed people can't do that … I think we need a system which captures everybody that's working. And the obvious way to do this, I think, is through the tax system," said Knox.
He said if a person has an income that is being taxed, then the government already has a framework to include them in some form of pension contribution. He said several Scandinavian countries have found a way to work around this system. They ask everyone who has fluctuating income to estimate what they'll earn in a year and then set up a pension contribution rate based on that. If a person earned less than they estimated, they get a credit towards their retirement contributions for the following year.
Knox said while this is not a perfect system because of the moving target, it's still better than leaving a big part of the working population out of the pension system, knowing that they'll become the state or someone else's problem down the line.
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