Heads up, kids: your retirement will probably be worse than your grandparents’

Heads up, kids: your retirement will probably be worse than your grandparents’

Old hands, retirement, coins

Younger generations are going to face greater risks of inequality than current retirees as the ratio of retirees to workers is set to double by 2050.

This stark analysis comes from a new Organisation for Economic Co-operation and Development (OECD) report, Preventing Ageing Unequally, which has found that while there were only 20 people over 65 to 100 of working age people in 1980, by 2050 there will be 53 seniors to every 100 working-age people.

Additionally, while historically most people have enjoyed average real incomes that have been slightly higher than the generations before them at the same age; this is no longer the case for those born after 1960.

 

“Younger generations will face greater risks of inequality in old age than current retirees and for generations born since the 1960s, their experience of old age will change dramatically,” the OECD said.

Continuing, the OECD said: “With family sizes falling, higher inequality over working lives and reforms that have cut pension incomes, some groups will face a high risk of poverty.”

The OECD also noted that inequalities have grown with each generation and “among people starting their working life, it is now already much higher than among today’s elderly”.

The body warned that future elderly will live longer but will be a more diverse group, with more people having had unemployed periods, or low wage-earning periods while others will have “enjoyed higher, stable earning paths”.

“Inequalities in education, health, employment and income start building up from early ages... A 25-year-old university-educated man can expect to live almost eight years longer than his lower-educated peer, on average across countries; for women the difference is 4.6 years,” the OECD said.

“Raising the retirement age tends to widen inequality in total pensions between low and high earners, but the impact is small,” the organisation continued.

“Gender inequality in old age, however, is likely to remain substantial: annual pension payments to the over-65s today are about 27 per cent lower for women on average, and old-age poverty is much higher among women than men.”

Looking deeper: Australia

Looking at Australia in particular, the OECD said: “The pace of ageing is slower than in the OECD area as a whole, which gives Australia more time to take measures to prevent or mitigate unequal ageing and cope with poverty risks at older ages.”

However, the body also warned that Australia’s solid 25 years of economic growth has been accompanied by “substantial inequalities in health and income”.

“Income inequality in Australia has grown from generations born in the 1920s to the Baby Boomers and the Millennials, as in most OECD countries. However, contrary to the common OECD pattern, most of the inequality increase took place between the 1920 and 1950 generations.”

Additionally, three in 10 Australians older than 75 are defined as income-poor as they live on less than half the median income.

The OECD argued that this could be attributed to the high number of Australians taking superannuation funds as lump sums upon retirement, acknowledging that this trend can hinder “comparison of relative income poverty measures between age groups”.

However: “Taking out lump sums from pension schemes can truly increase the risk of falling into poverty in case retirees outlive their assets, a risk which increases with higher longevity.

“Annuitisation is not very common in private schemes in Australia and few pension plans have mandatory survivor schemes in place,” the OECD said.

Commenting on this, the organisation called for a minimum of superannuation funds to be “taken as an annuity to avoid people from falling into poverty once they run out of assets from the lump sum payment”.

But not all is lost

The OECD proposed a three-pronged approach to address this ageing-inequality nexus.

1.       Prevent

Governments should take steps to prevent inequality from manifesting in the first place and “before it cumulates over time”.

“Measures should include providing good quality childcare and early education, helping disadvantaged youth into work and expanding health spending on prevention to target at-risk groups.”

2.       Mitigate

The next step is to challenge “entrenched inequalities”.

The OECD suggested health services move to more patient-centric approaches, while employment services should “boost efforts to help the unemployed back into work, as well as remove barriers to retain and hire older workers”.

3.       Cope

The final tier involves countries acknowledging that while reforms to retirement income systems “cannot remove inequality among older people” it can mitigate it to an extent.

“Well-designed first-tier pensions can limit the impact on pension benefits of socio-economic differences in life expectancy. Some countries have pension adequacy risks, especially for women,” the OECD said.

“Making home care affordable and providing better support to informal carers would also help reduce inequalities in long-term care.”

Heads up, kids: your retirement will probably be worse than your grandparents’
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