Retiring later: what is the impact on your savings?

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A broad trend

In the last few years there has been a trend in OECD countries to push back the legal minimum retirement age. With a fixed retirement age of 62 years, France still ranks almost last in this area within the OECD. However, this is a central theme in the 2017 presidential campaign. Some countries, such as Germany, are already planning to raise the limit to 67 years.

Exhibit 1: Current and future age of retirement for a man beginning work at the age of 20

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Source: BNP Paribas Asset Management, as of December 2016

The main explanation: increased life expectancy

This phenomenon is due mainly to the significant gains in life expectancy over the past half-century.

Exhibit 2: Life expectancy at birth, 1970 and 2011 (or nearest year)

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Source: OECD health statistics 2013, World Bank for non-OECD member countries

How do we finance these additional non-working years?

Western countries have never been so heavily indebted and their priority is to reduce their public deficits. Pay-as-you-go retirement systems have been squeezed hard on the one hand by heavier benefits to be paid out because of the increased number of retirees, and on the other by declining contributions, due mainly to increased joblessness. In fact, the ratio of working people to retirees is constantly rising .

So increasing the minimum legal retirement age has been the variable most widely used in recent years to save retirement systems.

Seniors must work longer, but can they?

As a direct result of this change, older people must work longer. But is this always possible? That depends mainly on their employment rate.

Exhibit 3: Employment rate of workers aged 55-64, OECD countries, 2007 and 2012

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Source: BNP Paribas Asset Management, December 2016

Exhibit 4: Employment rate of workers aged 65-69, OECD countries, 2007 and 2012

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Source: BNP Paribas Asset Management, December 2016

While it is true that more and more older people are continuing to work, there is still a wide disparity among OECD countries, and full employment is still a long way off. France is at the lower end of the rankings of the employment rate of workers older than 55 . While the employment of seniors has risen slightly in France, as in almost all OECD countries during the recession, the employment rate in France for the 55-64 years old age group is still below international averages: in 2012, 44.5% of French seniors were working, vs. 48% on average in Europe and 54% on average in the OECD.

The financial impact of higher minimum legal retirement ages

From the point of view of managing pension systems, higher minimum legal retirement ages help shrink the deficits of the first pillar and, in some cases, the second pillar, as in France, when they are triggered at the same time.

At the individual level, the burden must be shared by all generations.

For young workers, the retirement system will be more balanced and they will have longer to add to their supplemental retirement savings, keeping in mind that when it comes to savings the rule is “the earlier, the better”.

Given their current employment rate, older people are at greater risk of non-paid employment at the end of their career. To hedge this risk – i.e. to fund this possible period of joblessness – seniors must increase their retirement savings.


Written in December 2016

Alain Jaques

Product Strategy Manager, Retirement Specialist

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