Raising the retirement age is not a solution

In an earlier post on pensions, I noted that people calling for an increase in the retirement age have yet to address two considerations:

  1. Keeping the most senior employees in the workforce longer when there is already a shortage of jobs will make things worse for the “lost generation” of recent graduates.
  2. Even if we do extend the retirement age, there is no guarantee that these workers will be able to contribute productively past a certain age, especially in cases where the work involves physical labor.

The second point seems to be getting lost in the general “let them eat Geritol” attitude that seems to be forming toward the aged, but I would argue it’s even more important than the first. Some recent data (h/t ZeroHedge, of all things) from Europe’s 11-country Survey on Health, Aging and Retirement in Europe (SHARE) makes a sobering case about the likely path of productivity in an economy that requires its elderly to work longer.

Among other things, the SHARE survey tests cognitive functioning across five types of performance including orientation (awareness of the date), immediate and delayed recall of a list of words, verbal fluency and numeracy. Two Italian econometricians drew on this data for a 2009 study* where they used the SHARE test results in the context of human capital theory. Using a series of specifications to correct for various issues in the panel data, the authors repeatedly found that age (whether specified linearly or in a quadratic) had a significant negative effect across all five tests.

The results are even more compelling when presented graphically. The first chart below shows that cognitive performance among those surveyed declined steadily from about age 50 onward, for both genders (though women are consistently stronger than men):

Moreover, while employment is related to higher functioning across the tests, this only raises the peak from which the same decline occurs.

It seems to me that we face a near-term issue and a longer-term issue here. In the near term, while it’s nice to think that we can keep the economy moving by simply keeping older employees in the workforce, studies like this one will likely strengthen existing biases against older workers, especially for those forced to compete with younger applicants for a new job. So while having work for longer is clearly a benefit for older workers who have and are able to retain their jobs, extending the retirement age by fiat is not likely to be successful.

The longer-term issue has to do with demographics. The study cites a projection that there will be one elderly person for every two working-age people in Europe by 2060 (p. 1). Japan is further along this curve, while the US lags somewhat, but the destination is the same. Short of outsourcing to a Culture Mind, or a wholesale opening of borders to countries with younger populations, it’s not clear how we will be able to sustain a “knowledge economy” when some portion of the population is (if this study is correct) in cognitive decline.

* Mazzonna, F. & Peracchi, F. (2009). Aging, cognitive abilities and retirement in Europe, at SSRN here.

UPDATE (in addition to edits above): I realize this post may read like an indirect recommendation to set The Olds on an ice floe once they hit 50, and that wasn’t my intention. Clearly those tests don’t touch on the irreplaceable experience and characteristics that only seniors can offer, nor do I think they present a definitive case that anyone over 50 is one inevitable step from dementia. For example, it may be that the decline in capacities in that data set begins earlier than 50 – there’s no way to know since that’s where the charts begin.

My broader point remains that expecting people to work past 65 or so is not the simple solution it is made out to be, and in some cases may not even be possible. There is no substitute for a proper safety net.

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