Saturday, September 11, 2010

When Should You Retire?

With this blog post, I am seemingly coming out of a short retirement, so it seems appropriate to start with a discussion of retirements.** As you may know, France has recently been witnessing (larger than usual) protests and strikes against a proposal by President Nicolas Sarkozy to raise the retirement age there from 60 to 62 years of age.

Now, if you're an American reading this, you may initially feel a sense of anger or even injustice at the fact that a million French are opposing this proposal; Americans already have to wait until 65 for retirement -- and it is likely to be raised to 67 in the near future. Indeed, Americans delay retirement longer than people in most developed countries (see last link for that data).

I won't spend time debating who deserves earlier retirements because the differences in national laws is part of a much larger difference between the social support systems of various governments. Besides, people can come to expect any retirement age, and when you try to take that away from them -- whether it be 60 or 65 -- they will often fight to prevent losing this benefit.

Rather, what is happening in France and other developed countries -- a reconsideration of retirement age -- is a sign of larger global systemic shifts. As the world "flattens", to borrow from Friedman, the median person in once-poor countries are rapidly closing the income, education, and health gaps with the median person in developed countries. This is putting pressure on retirement ages in developed countries for at least two reasons:
1. Since people in developing countries are still willing to work for lower wages, they are, naturally, attractive to employers globally. Similar skills for half the price.
2. As middle classes grow in developing countries, these masses and their disposable income becomes, unto itself, a target market for the world's businesses. 
Both of these factors serve to take money away from the worker and, ultimately, the economies of developed countries. And if future growth rates in developed economies are depressed relative to the expectations of policy makers in years past -- when the original retirement age was passed -- then the slower economic growth rates won't be able to sustain current social support systems (because government tax revenue will be depressed). As this happens, governments can either raise tax rates or raise the retirement age.

This whole process was intensified by the recent global economic crisis as developed countries have tended to recover much more slowly than developing countries, thereby amplifying the factors mentioned above. With such pressure, governments in developed countries have to urgently make a choice to raise taxes or the retirement age. But during a period of slow or negative economic growth, raising taxes on most of the population could trigger even deeper recession. But raising the retirement age only saves money for the government; it is a more prudent choice.

Finally, one must consider life expectancy. When a retirement age is originally established, it was only a few years below the country's life expectancy. But based on World Bank data, this reality has changed markedly. Back in the 1960s, most developed countries had average life expectancies of, at, or around 70 y.o.a. Today, that number is around 80 y.o.a. Yet most retirement ages have remained the same or only increased by a year or two. This means that the government is supporting most people for another decade or more.

In times of robust healthy economic growth, this is a luxury that developed countries can afford, but now that the rest of the world is catching up, they want a better life for themselves and their families. This necessarily means that resources will be (proportionally) taken away from developed countries and competition for work will increase. So no matter what you personally believe is fair, the average Joe (or Jose, James, Jaeger, Jiro) is going to have to work later in his life than his father before him.

**Personal Note: It's now been over three months since I've found time to write on this space! The primary reason is because I've been writing Chinese essays elsewhere -- namely, essays for my Chinese MA which began in June and took up much of the last three months. For other information on the my exploits, see this blog.

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