Special Report: Reinventing Retirement

By Richard Adler
Vice President for Research and Development
Civic Ventures

December 2004

Old Europe is getting older.  And so is Japan.  In fact, like the U.S., all of the developed countries in the world are facing challenges resulting from the aging of their populations.  But how severe these challenges are, and how countries choose to respond to them, varies greatly from one country to another depending on their specific demographic profiles and their policies related to retirement. .

These were among the conclusions of an international conference on "Reinventing Retirement" that took place in London in November, 2004.  Participants in the conference (sponsored by AARP's Global Aging Program and the UK's Financial Times newspaper) included representatives of government, business, academia and non-profit organizations from Europe, Japan and the U.S.  The conference provided a global perspective on the need to redefine and restructure retirement and the importance of keeping workers productively engaged in later life. It also provided an opportunity to learn about some innovative projects that are tapping the experience of older adults in other countries.

U.S. participants in the conference included Marc Freedman and Richard Adler from Civic Ventures.  Also attending from the U.S. were Gloria Cavanaugh, president of the American Society on Aging, and Paula Panchuk, Dean of Lasell College (Newton, MA), along with a contingent of AARP staff and board members.  This special report summarizes highlights from the conference. 

The Demographic Imperative

Increasing longevity and falling fertility rates are demographic facts of life in virtually every developed country.  As Andrew Gower, editor of the Financial Times, pointed out, people over age 65 have historically represented two to three percent of "the rich world's population."  Today, however, older people account for 15 percent of the population of these countries, and this percentage will grow steadily in the coming decades.  Adding to the challenge of aging populations is the fact that the rate of increase in life expectancy after age 65 has been steadily incresing over the past several decades, and is likely to continue to do so as we learn more about healthy aging.

Equally significant is the universal decline in fertility rates, which has been particularly pronounced in Japan and in much of Europe.  But the birth rate in all developed countries is below "replacement rate," which means that the proportion of younger people is falling dramatically in relation to an expanding older population.

The Retirement Paradigm

The institution of retirement, which AARP CEO Bill Novelli described as "the cultural agreement that, at a certain age, one stops working," is deeply entrenched across the developed world.  But the concept of retirement is relatively new in historical terms.  Over the past 50 years, every developed country introduced publicly funded pensions and adopted policies encouraging companies to offer private pensions, which have provided retirees with a degree of economic security.  Along with policies that impose a mandatory retirement age (which are still prevalent in most countries outside the U.S.), these pension schemes have been important in helping to ensure full employment by encouraging older workers to leave the workforce to make room for younger workers.  And in recent decades, the concept of early retirement has gained popularity as a corporate tool for cutting costs.

The Pensions Crisis

According to the Organization for Economic Co-operation and Development (OECD, the organization representing the world's developed countries), outlays for public pensions will increase from an average of 11 percent of GDP among its members to 18 percent of GDP over the next 30 years.  But averages like this obscure enormous variations in how well different countries support their retirees.  In Spain, for example, public pensions provide retirees with the equivalent of nearly 90 percent of the country's average wage. In France, Italy and the Netherlands, pensions provide for about 70 percent of the average wage. One speaker described the Netherlands as a true "pensions paradise" where the combination of public and private pensions enable the typical worker to retire, often before age 60, with nearly 70 percent of his or her final pre-retirement salary.  By contrast, Social Security in the U.S. covers 40 percent of an American's average wage, while in the UK, the figure is just 35 percent. 

Not surprisingly, the severity of the coming pensions crisis varies substantially from country to country. But in every developed (G7) country, taxes paid by current workers will not be sufficient to cover pensions for retirees at some point in the future.  There was a general consensus among the conference participants that solving this problem will involve some combination of working longer, reduced benefits and/or higher taxes, which John Monks, General Secretary of the European Trade Union Federation described as "all bad news."  Monks noted that adopting policies to encourage longer working lives will be less difficult in countries with dynamic economies and full employment.  He called the Nordic countries "stars" in this regard, because they have already introduced flexible retirement plans and other options that make it easier and more worthwhile to keep working longer.

The Workforce Challenge

Reducing countries' pensions burden is not the only reason for encouraging longer working lives.  According to Annemie Van de Casteele, President of the Commission of Social Affairs in Belgium, the overall working population in Europe will begin to decline as soon as 2010.  The result will be to make European economies less competitive compared to other parts of the world.

The impending retirement of so many workers may have negative impacts on individual employers as well as entire economies.  An article in a special Financial Times supplement on "Reinventing Retirement" issued to coincide with the London conference pointed out that a company's most experienced workers often possess "deep smarts" about how these companies actually operate. Among the examples cited in the article of the consequences of losing these unique resources:  "When the Russians approached International Harvester to build a factory, there was no one left who knew how it was done." 

In terms of encouraging older workers to remain in the labor force, Europe and Japan lag behind the U.S.: While age discrimination has been illegal in the U.S. since 1967, the European Union has only recently called on its members to pass laws to combat age discrimination in the workplace by 2006.  And just this year, Japan raised its mandatory retirement age – which is enforced by 90 percent of Japanese companies – from 60 to 65.  Several speakers called for abolishing mandatory retirement ages entirely (only the U.S. and Australia have done so to date), and to eliminate incentives that encourage early retirement.

Some employers have begun to recognize the need to encourage older workers to keep working.  Bodo Marshall, Corporate Executive Director at Volkswagen, explained that his company has abandoned its previous policies that encouraged early retirement, and now believes that its "older workers are indispensable" to keeping the company competitive and profitable.  Marshall described Volkswagen's new "50 Plus Program" aimed at retaining older workers.  It includes modifying job designs to accommodate the needs of older workers, providing employees with more active health promotion, and expanding lifelong learning for all workers (surveys have shown that older workers tend to receive substantially less corporate training than younger workers). 

Reinventing Retirement

While much of the conference focused on the challenges of refinancing retirement, some attention was given to reshaping the institution of retirement to respond to new demographic and economic realities.  Marc Freedman pointed out that the introduction of Social Security in the U.S. did "an immense amount of good" in providing economic security for retirees and was quite effective in encouraging older workers to leave the workforce.  But it created an unanticipated problem: what would workers do after retirement?  The answer, for the past half-century, was based on a life of leisure.  But that model is increasing obsolete since we simply can't afford to support a leisure class that is one-quarter of the adult population.  We now need to figure out how to "tell a new story" about retirement.  Freedman proposed that we shift from viewing retirement as offering "the freedom from work" to a new lifestage that offers "the freedom to work" – that is, to continue to work, but in a way that is more personally meaningful and socially beneficial

Hiro Murata, President of Murata Associates, Inc. of Tokyo, supported the premise that retirement will increasingly involve work, though it may differ from mid-life employment in some important ways.  He offered a useful distinction between two different motives for employment – having to keep working and wanting to keep working – that involve distinctly different issues. 

Virgilio Oñate, Chairman of Seniors Españoles para la Cooperación Técnica (SECOT), described how his organization recruited retired executives from Spanish banks and financial services firms to work with young entrepreneurs on preparing business plans for new ventures.  As a result of these collaborations, several hundred new start-up businesses have been funded.

Summing Up

According to Ladan Manteghi, AARP's Director of International Affairs, the conference identified four priorities areas that "need immediate action" in all of the participating countries.  These priorities are the need to restore public confidence in retirement systems; the need to expand opportunities for workers who want to continue working beyond retirement age; the need for greater job flexibility and training; and the need to reform pension regulations to permit continued employment without penalties. 

Bill Novelli concluded the conference by proposing several possible next steps.  Among the most interesting proposals were convening a series of regional discussions of the issues raised by the conference, and creating a mechanism to share best practices in reinventing retirement on a global basis. 

Useful Resources

AARP's Global Aging Program.  Provides a variety of resources on various aspects of population aging internationally, including a special issue of AARP's Global Report on Aging on Reinventing Retirement and the results of a survey of "global opinion leaders" on aging issues that was presented at the London conference. The survey found that while there is a general recognition among leaders of the G7 countries that aging issues are major priorities on their country's agenda, most countries – particularly Germany, Italy and Japan – are not yet ready to deal effectively with these challenges.  www.aarp.org/international

Special supplement on Reinventing Retirement, Financial Times November 17, 2004.  news.ft.com/cms/c7cb9456-330f-11d9-b6c3-00000e2511c8.html.  (Subscription required.)

OECD paper on "Policies for an Ageing Society: Recent Measures and Areas for Further Reform" describes changes in retirement and pension policies in OECD member countries.  www.olis.oecd.org/olis/2003doc.nsf/linkto/eco-wkp(2003)23

Speech by Alan Johnson, UK State Secretary for Work and Pensions to the London conference on the British government's approach to "planning for an ageing society."   www.dwp.gov.uk/aboutus/2004/18_11_04_aarp.asp

The Ageing Revolution – A series of lively articles from the BBC exploring the implications of Britain's aging population.  The site includes profiles of "older activists" and speculation about prospects for extending human longevity – perhaps to 1,000 years. news.bbc.co.uk/1/hi/in_depth/uk/2004/ageing/default.stm.