1. The Age of Retirement Professor Kevin Davis Research Director Australian Centre for Financial Studies

2. Round Table Outline Why older official retirement ages (ORA) globally? What is the underpinning philosophy/ideology? What role does ORA play in retirement decisions? – v Health, Employment Opportunities, Super Access What follows “retirement” ? – health, mortality, work, financial considerations So: who wins, who loses from an increased ORA? Policy considerations

3. Round Table ORA Trends – OECD Average Source: OECD, Pensions at a Glance

4. Round Table  Demography – Increased dependency ratios (retirees/workforce) – Increased longevity Leading to  Government Budgetary Issues – Increased age pension / social security costs – Increased health costs etc ORA Trends - Reasons

5. Round Table

6. Philosophy and Ideology Australia – age pension an annual entitlement – At designated age, Irrespective of years worked, unrelated to life expectancy, “use it or lose it” Internationally different approaches – USA – some flexibility in access to social security, related to years worked/contributions, some actuarial fairness – start earlier, get less p.a. Explicit “tax” contributions v General Budget Funding – How does this affect the thinking about equity issues?

7. Round Table  Individuals could be eligible for the age pension – At same age for all – After some specified number of years in work force – At age linked to expected remaining lifetime – At age of their choice (with implications for amount received)  Amount of age pension could be – Unrelated or related to prior tax contributions Eg USA social security contributions – Actuarially fair or fixed annual rate “Fairness” - Later age of access implies higher annual rate – Dependent or Independent of personal wealth NZ – independent; Australia – related to some components Some Alternative Approaches

8. Round Table  Individuals calling themselves “retired” may be – part of the hidden unemployed – in receipt of disability/health benefits – no longer in long term career occupation, doing other work – Over ORA and receiving pension/drawing down savings  Many retirees over ORA subsequently become “unretired”: re-entering workforce for some period – USA: estimated at around 25 per cent – Australia: around 10 per cent in 2007 (ABS) 310,000 former retirees in workforce v 3.1 million retired Main reasons: financial need (36% males, 42% females), bored (32% males, 14% females) What is retirement?

9. Round Table Retirement Intentions “Optimistic” but consistent with recent experience

10. Round Table Average Effective Age of Retirement: Men Source: OECD Reversal of trend or GFC effect?

11. Round Table Average Effective Age of Retirement: Women Source: OECD

12. Round Table Retirement Reasons other determinants not shown including timing of retirement to coincide with that of partner, pursuit of leisure/holiday activities, etc. are more important for females caring for others was relatively more important within the health/family reasons category for females.

13. Round Table Retirement: labour market influences Participation much lower for 55+ group “early retirement” due to: Health Redundancy and lack of suitable skills for alternative jobs Implicit age discrimination in hiring Financial security Workforce Participation rates

14. Round Table Cumulative Change in Industry Employment (000’s) Feb 2005- Nov 2012 Changing employment patterns and technological change – problems for older workers!

15. Round Table  Age relative to expected retirement age is a predictor of workforce participation  Increasing ORA likely to increase actual retirement age – Direct effect – need to work longer to access pension income – Indirect effect – less employer resistance to employing older workers (due to longer expected tenure) – Psychological effect – ORA is “reference” or “anchor” point influencing individual perceptions of “normal” retirement age And policy statements which emphasize early retirement as losing future benefits (of higher retirement savings) rather than later retirement as increasing future benefits may have more impact on decisions. Does the ORA affect early retirement decision?

16. Round Table  “Rational” retirement decision compares cost of working longer with additional retirement wealth – Increase in ORA encourages continued working due to further distance from accessing pension income Same effect from increasing the preservation age for superannuation access – Means testing of pension income discourages continued working (to the extent that additional savings reduces pension income) Do tax incentives play a role?

17. Round Table Does the Preservation Age (PA) Matter? Access to super clearly a determinant for retirees from age 55 onwards – PA = 60 for those born after July 1 1964 Tax free withdrawal above age 60 “Transition to retirement” from 55 and earnings taxfree 1/3 of super drawn down before age 65 (Tax Review – Retirement Income Strategic Issues paper)

18. Round Table Does the PA Matter? 50+% of age group 50-60 state reaching PA is an important factor determining retirement intentions in 2003 HILDA survey, more than for reaching ORA (Felmingham et al, 2006).

19. Round Table Tax & Pension Incentives to Retirement “the Australian retirement system does provide an incentive to retire early. However, men are much more likely than women to respond to these financial incentives.” Warren & Oguzoglu (AER, 2010) – Particularly for men between 60-64 – Financial incentives for women have little importance – Based on “How much does extra year of work increase expected total lifetime retirement income versus disutility of work?” – Increasing retirement age reduces incentive to retire early – and creates “new normal” expectations.

20. Round Table  Varies across countries – Around 15% in USA, Canada, Denmark, Japan, Norway – Much higher in continental Europe  Higher in high unemployment periods  Labour market policies relevant (job security policies arguably affect willingness to hire older workers)  For Australia – 27% if defined as: laid-off, left job for medical reasons, or self employed business closed (Barrett & Brzozowski, 2010) – 40% if definition includes left job for non-retirement reason How much early retirement is involuntary

21. Round Table  Poor health leads to expectations of retiring earlier Health and the Retirement Decision

22. Round Table  Involuntary v voluntary retirement crucial – Decline in grocery expenditures for those involuntary retirees, but not for others (Barrett & Brzozowski, 2010) – Reduced financial and life satisfaction for involuntary retirees, but slight increase in life satisfaction for others  Retirement as a determinant of mortality – Positive/Negative - Literature provides no definitive guidance Studies using changes in ORA (and thus actual retirement age) for different groups can control for health influences on actual retirement etc No apparent relationship in a recent study using Norwegian data (Hernaes et al, 2012) “mortality considerations should not have a prominent place in policy considerations of the retirement age” Post retirement outcomes

23. Round Table Post Retirement outcomes Significant increase in older age home-owners with a mortgage (30.7% of 60-64 age group in 2010 v 16.5% in 2002) - Kelly Report” for CPA Australia. Assets test incentive to invest in higher value housing and use super to pay-off mortgage – How significant? Use of higher leverage to fund pre-retirement lifestyle – How significant?

24. Round Table Conclusions – Policy Issues