Your Investments: Pope Benedict and retirement age

The recent shock retirement of 85-year-old Pope Benedict XVI, the first papal retirement in more than 600 years, has brought work/life balance issues during retirement into the forefront. While it used to be that you basically worked until you died, today many retirees can expect to live 20 to 30 years in retirement, and the question of how to fill all that time is just as important as how to fund all that time. It’s an issue that I see all the time with clients, and unfortunately it doesn’t get much press. I will speak more about it in an upcoming column.

Another issue that the pope’s retirement has brought to the forefront is that of the retirement age. With the social safety net crumbling in country after country, one of the best ways for governments to save money is by raising the retirement age. This way those workers in their mid-60s still pay into the system, and the system delays having to pay them retirement benefits. While Israel lacks the same demographic issues that are common in the West, it shares the same budget crunch. As a result, the Finance Ministry is working on a plan to raise the retirement age gradually to 70.

The Finance Ministry is focusing on economics, Globes reported, and according to one of its officials: “On the macroeconomics side, rising life expectancy and the growth of the working-age population is falling to below 2.2 percent, which means less economic growth. If we’ve gotten used to 3%-4% GDP growth a year, within 20 years we’ll have 2.5%-3% growth – automatically. You must increase the labor force.”

A look at the data According to the American Academy of Actuaries, the retirement age in the US was set at 65 way back in 1940. At that time the average life expectancy of a 65-year-old retiree was 12.7 years for a male and 14.7 years for a female.

In the 70 years since then, it’s now over 18 years for a man and over 20 for a woman. If individuals are living longer, there is no reason that they can’t work longer. It’s great for the economy and keeps the older individuals working, which is exactly what many want to do in any case.

Additionally, the longer they work, the easier it will be to fund their remaining retirement years. One of the biggest issues facing retirees is funding all of those post-retirement years and the lifestyle that leisure brings. As I have mentioned here many times, I have rarely seen someone who no longer works spend less money than when they were working. Or for you mathematicians: Leisure equals money spent. By allowing workers to work longer, they won’t need to start tapping into their benefits or savings, and they can increase their savings by continuing to put money away.

The other side of the coin Unfortunately, not everyone agrees with this cure. In this past Sunday’s Jerusalem Post editorial said there is no need to raise the age because it will cause more harm than good.

“Hence the facile solution both here and abroad is to keep the oldsters from retiring,” it said. “That translates to paying out less while the economy keeps profiting from their labor and extensive experience.”

Why is this “facile”? This is common sense; it’s not superficial.

If people keep working, the economy keeps growing, they keep saving and the government has to pay out less – that’s how an economy works.

The next argument is: “The danger, though, is that instead of enjoying the best of all worlds, a worst-case scenario would manifest for all of society’s components. If older citizens are required to work more years, they’ll per force deny younger applicants jobs. More likely, though, is that as employees age, they’ll be sacked because long tenure inevitably makes them expensive to their employers.”

Is employment a zero-sum game? The author seems to imply that if one person works, it automatically means that someone else does not. The problem is that a growing economy creates jobs, and that means there will be both work for “oldsters” and younger applicants. The hottest issue in coalition talks has been about “sharing the burden” vis-avis military service. Well the bigger issue is economic.

According to the same Finance Ministry official, “Today, there is one retiree for every five workers. The ratio is plummeting, and in the next decade, the ratio will be one retiree for every three workers.” Talk about sharing the burden.

It’s been well documented that Israel is in need of more engineers and other skilled workers. There is no hard evidence that by raising the retirement age, suddenly we will have a rash of age-discriminatory firings, and in fact the absurdity that the Knesset needs to pass a bill for doctors to work past 70 is proof.

Retiring at 65 is not a G-d-given right. It was based on life expectancy, and it only makes sense that as people live longer, it should be raised accordingly. It’s good for the economy and good for the retiree.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel