The aging process of the population in Latin America and the Caribbean will only accelerate in the coming decades. We will need to revise the retirement age in our countries in line with demographic change to guarantee reasonable retirement amounts and the financial sustainability of pensions.
Raising retirement age allows us to broaden the contribution base and, at the same time, preserve the adequacy of pensions for those who work longer. However, we know that these changes are difficult for governments to implement and come with resistance and social discontent. They are often perceived as unfair.
How have countries in the world raised retirement age? Let’s look at two relevant cases: Denmark and the Netherlands.
Denmark: ‘soft’ changes 15 years ahead of schedule
Denmark’s is considered one of the best pension systems in the world and was one of the first to address the financial pressure of increasing life expectancy by raising the retirement age. Unlike other countries, these measures were well received by the public and were perceived as timely and fair. How did Denmark achieve this change?
In 2006 and 2011, retirement age was increased through pension reforms from 65 to 67, setting six-month increments between 2019 and 2022. In addition, a mechanism was defined to continue updating it semi-automatically with the aim of maintaining a constant retirement period of 14.5 years generation after generation. We say semi-automatic because it requires parliament to endorse the mechanism every five years.
This update is based on changes in the life expectancy of 60-year-olds and is considered ‘soft’ because the increase in the retirement age has to be greater than 6 months and cannot exceed one year, in each five-year period. Another key to the social acceptance of this measure is that changes are decided 15 years before they occur, so the first increase based on this mechanism will be implemented in 2030 and will bring the retirement age from 67 to 68.
In addition, the mechanism directly incorporates a gender factor because it uses unisex mortality tables, and also addresses existing socioeconomic differences: it incorporates an early retirement scheme that compensates for differences in longevity. In this way, it indexes the retirement age to changes in life expectancy in a comprehensive manner.
Netherlands: each generation should have a retirement phase of similar duration
In the Netherlands the aim is that each generation enjoys about 20 years of retirement, so the country included life expectancy in its formula for calculating the increase in the retirement age. This represents a large adjustment considering that the retirement age was unchanged between 1957 and 2012 with a steady retirement age of 64. Thereafter, increases (in months) were made in most years until 2021 and, in 2022, the pace was further accelerated to reach 66 in 2024.
Beginning in 2025, the increase will be independent of gender or socioeconomic group, and will depend on the increase in life expectancy at age 65. The retirement age will be maintained as long as life expectancy does not increase significantly. If life expectancy increases sufficiently, an increase will be set and this change will have to be announced five years before it comes into effect.
Countries such as Denmark and the Netherlands are advocating an increase in the retirement age as a mechanism to ensure the sustainability of their pension systems, arguing that increasing working periods and lifetime earnings boosts consumption and economic growth while preserving pension adequacy for those who work longer.
Do you think it will be possible to modify retirement ages in Latin American and the Caribbean? Share your opinion in the comments!