Pensions, longevity & productivity

The Economist advocates a rise in the pension age, on the grounds that we are living longer. But I’m not sure this is a problem.
Let’s start from a basic fact. Whatever pension system we have - public or private, funded or unfunded - pensions must be paid by existing workers. This is because only these generate the real resources that must be handed over to non-workers.
This means that if workers become more productive, they can afford to support a longer retirement or more pensioners.
And this has happened historically. Since 1981, life expectancy for UK males aged 65 has increased from 13 to 18.3 years - a 40.8% rise. But during this time, output per worker has risen even faster, by 65.6%.
This could continue. The number of pensioners per 1000 working age people is projected to rise from 316 now to 387 in 2033. This is an increase of 0.9% a year. But in the last 30 years, output per worker has grown at twice this rate.
Higher productivity, then, should pay for increased leisure. And in a sense, these are two sides of the same coin. The same general technical progress that increases longevity also increases productivity.
So, where’s the problem? I suspect there are three other issues, which could interact nastily:
1. It’s possible that productivity growth in the future won’t be high enough to match the increased dependency ratio.
2. It’s not just more pensioners that higher productivity must pay for. Thanks to Baumol’s cost disease, the relative cost of healthcare and education also rises as we get richer. And if you believe we now live in a Malthusian world in which diminishing returns will increase the relative cost of commodities (and the Economist doesn‘t!) , the real cost of food and oil will rise too. Pressures on living standards from these other sources will make it harder to transfer resources to pensioners.
3. “Transfer resistance” will rise. Workers will be reluctant to pay higher taxes to future pensioners, perhaps because they feel they (me!) got a better deal than they did - for example by getting a free university education. Or perhaps higher taxes will push us to the wrong side of the Laffer curve.
I don’t know how significant these issues are. But it is these that’ll determine how generous a pension system we can afford. Longevity is not the main issue.

Comments

[Jennifer]

"Since 1981, life expectancy for UK males has increased from 13 to 18.3 years - a 40.8% rise." --> may wanna correct that ;)

Other than that, interesting point that you make. With regard to the transfer resistance, I believe that another factor fuelling this problem may be the decreasing faith of current workers in the system. At least in my country (Germany), people are doubting whether they will even benefit from public pensions once they retire, or are afraid that those pensions will not be high enough. As a result, more and more people turn to private pension funds and feel that the money they contribute to the public ones is "wasted".

[Jon]

Looking at the source data I think those figures are life expectancy from retirement age. I.e. in 1981, someone who retired at 65 could expect to live for 13 more years to live to 78. Someone who retires today at 65 would on average live 18.3 more years - to a bit past 93.

[Left Outside]

It is a question of how we want to distribute our leisure time. Do we (I)want it all at the end of our lives or do we (I) want to work longer with more leisure during my working life.

I prefer the latter, but it is not possible for me to easily work out how to transform that into pubic policy.

My favoured opinion (of which there are many) for retirement, which I often propose while drunk on a weekday evening is PREtirement. Everybody gets a guaranteed, reasonably generous income until their 30, then you work until you die.

[Cliff Tolputt]

Mm! 93 suggests you'll be living on borrowed time (sorry Jon), but I'm all for it.

[Jennifer]

Thanks for clearing that up Jon, that makes sense!

[chris]

Sorry Jennifer. Thanks Jon. I meant the extra life expectancy at age 65; ie it's risen from 78 to 83. I've made the correction.

[chris]

@ LO - I've long thought the opposite - that work should be confined to the under-30s, as they're the ones with the energy.
The solution here - of course! - is a citizens' basic income, which would allow folk to take breaks as they want.

[Alex]

"Thanks to Baumol's cost disease, the relative cost of healthcare and education also rises as we get richer"

Only because the cost of everything else gets cheaper.

[gastro george]

"Workers will be reluctant to pay higher taxes to future pensioners, perhaps because they feel they (me!) got a better deal than they did - for example by getting a free university education."

This is a classic diversionary tactic. Workers today get a worse deal because they are not getting their share of productivity increases. Blaming pensioners is just trying to get them to sign up to a "cost cutting agenda" that will end up with them being even worse off.

[Rozer]

This is a classic diversionary tactic. Workers today get a worse deal because they are not getting their share of productivity increases. Blaming pensioners is just trying to get them to sign up to a "cost cutting agenda