March 17, 2013

The discussion in Congress and the White House on retirement contributions and minimum retirement ages are not unfounded. We are living longer and healthier, while the number of taxpayers projected to support the growing population of retirees is falling relative to what it was in the mid-1900s when many of the programs took their current shape.

Given the changes in lifespans and worker-retiree ratios, adjustments have to be made.

Europe is facing a similar situation. Populations there are growing older, and there are fewer taxpayers to support the growing number of retirees in much of Europe. The rates of in-migration are also lower compared to the United States, so several countries – Italy in particular – are actually suffering from declining populations.

It goes without saying that a country can’t support its public pension retirees if there aren’t enough young workers to pay taxes.

Just last month, a European leader said what few have been able to say until now.

Swedish Prime Minister Fredrik Reinfeldt told Dagens Nyheter: “If people believe that we can live longer and shorten our working life, the pension will for sure be reduced. The next question is then, are people prepared for that. In most cases I don’t think so.”

He says that every second child born in Sweden today is expected to reach the age of 100.

He was not proposing an increase to the retirement age, he noted according to AARP’s report of his comments, but rather changes to “enhance flexibility.” He said he wanted to “bring about a mental change” to show that, in the future “people aged 70 or 75 will to a greater extent be part of working life.”

And 75 became the headline across Sweden and across Europe.

The demographic research organization Population Europe hosted a discussion with two demography researchers from the Centre for Economic Demography in Sweden. They noted that several countries in Europe – such as Sweden and Germany – have gradually relaxed the upper retirement ages in their respective countries (unlike the United States, some countries in Europe and Asia have upper retirement ages when workers are required to retire). “The mean age of retirement has started to increase,” according to the demographers.

They continued: “Our own studies show that a gradual increase in the minimum retirement age to 70.5 years over the next several decades will be enough to maintain the standard we have today. This equates to an increase in the retirement age of around one month per calendar year.”

At one month per calendar year, it would take twelve years to increase the retirement age one additional year. Since Sweden’s upper retirement age of 67, it would take 36 years to raise the age to 70.

In comparison, the minimum retirement age (MRA) for most U.S. federal government workers is currently 57. Social Security allows workers to receive a reduced monthly payment at 62, while full retirement age for Social Security purposes is 67.

Interestingly, the age of 70 happens to have been the initial retirement age for a federal workers. Could it be that we will witness are return to this retirement age in our lifetime?

This definitely makes a good case for saving and investing in the TSP and other tax-advantaged vehicles, because with personal wealth you won’t have to worry about changes to pensions and Social Security.

Related topics: longevity annuities