Thursday, April 12, 2012
The IMF is urging governments to lift the pension age in line with rising longevity and allow retirement funds to reduce retirees' benefits to match the income available.
In an early chapter from its latest Global Financial Stability report, to be released next week, the IMF points out that in just 20 years, life expectancy in the West, including Australia, has risen by three years more than was forecast at the time.
While this "has obvious benefits", the IMF says, it also has less obvious costs and they could be massive.
"Unexpected longevity, while clearly beneficial for individuals and society as a whole, is a financial risk for governments and defined-benefit pension providers, who will have to pay out more in social security benefits and pensions than expected," it warns.
"It may also be a financial risk to individuals, who could run out of retirement resources themselves.
"If individuals [by 2050] live three years longer than expected in line with underestimations in the past the already large costs of ageing could increase by another 50 per cent, representing an additional cost of 50 per cent of GDP in advanced economies."
In Australia, that could mean that by 2050, an average 60-year-old could expect to live into his or her 90s. Back in 1970, men that age were expected to live only to 75.
The cost of public services rises sharply with age. People over 65 occupy half the beds in public hospitals, although they form just an eighth of the population. People aged 75 to 84 visit the doctor three times more than those aged 45 to 54, and run up five times more pharmaceutical bills.
The older people are, the more likely they are to be on the pension and ultimately, in a nursing home.
Official forecasts keep underestimating actual growth in life expectancy because they assume the rapid growth in longevity will level off. But the IMF points out that in fact it never has. Medical advances such as treatments for AIDS and some cancers keep raising life expectancy, even for 80-year-olds.
With the number of retirees now growing rapidly, further rapid growth in longevity could overwhelm public and private retirement funds.
Looking at US pension funds, the IMF found that if life expectancy rises an extra three years, it would increase their liabilities by 9 per cent without a matching rise in assets, capsizing their balance sheets.
It urges governments to:
. Lift the pension age to match lifespans, putting a cap on time people spend in retirement. Australia plans to increase the pension age, but only from 65 to 67, and only after 2017.
. Give pension and retirement income funds the ability to reduce defined benefits if longevity rises faster than expected. Germany, Japan and other Western countries have already reformed their pension schemes this way.
. Introduce mechanisms to allow retirement funds to transfer their "longevity risk" to other financial institutions, as a kind of insurance.