Charles A.E. Goodhart, Philipp Erfurth04 November 2014
Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing. This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.
Our history is our database. When seeking to peer dimly into the future, our normal response is to examine what happened in (similar) past episodes and then to extrapolate those outcomes into the future. This assumption, that the future will mimic the past, is hard-wired into almost all our forecasting exercises, from the most simple to the econometrically and technically most complex.
The world’s population is ageing, due to both increasing longevity and decreasing fertility. This column shows that the net effect of ageing on capital accumulation (and therefore growth) depends on which of these two factors dominates, and also on the structure of the pension system. Under a pension system with defined contributions, a reduction in fertility induces adjustments in savings and working life that unambiguously increase capital per worker.
An ageing world population is expected to shape the economic future of the globe. According to UN calculations, the total world population will increase by 40% and the median age will increase by 7.8 years by 2050. Compared to a few decades ago, these rates represent a significant deceleration in population growth and a sizeable acceleration in ageing.
Identity and wellbeing: How retiring makes the unemployed happier
Clemens Hetschko, Andreas Knabe, Ronnie Schöb04 May 2012
Most people’s wellbeing is permanently affected by unemployment. This column argues that the unhappiness is due to a loss of identity, rather than daily experiences. Using German data, it shows that the long-term unemployed become happier upon entering retirement, thus changing social category, even though this does not change their daily lives.
Most people adapt surprisingly well to changes in their lives. Even after tragic events such as the death of a family member or a chronic disease, they restore their former wellbeing, if not always completely (Clark et al 2008). There is one event, though, for which this appears not to be true – unemployment. Compared with other negative experiences, the life satisfaction of the unemployed does not restore itself even after having been unemployed for a long time.
James Choi, Emily Haisley, Jennifer Kurkoski, Cade Massey28 March 2012
As if today’s problems aren’t enough, in the coming years Europe faces what economists are calling a ‘demographic timebomb’, with ageing populations placing an unsustainable burden on already precarious public finances. In order to encourage more people to save for themselves, this column argues that using a psychological intervention can increase contributions to retirement savings accounts by up to 2.9% of income.
There is widespread concern that individuals do not save enough for retirement because they are financially illiterate (Lusardi and Mitchell 2007, Bucher-Koenen and Lusardi 2011) or suffer from self-control problems (Angeletos et al 2001). This concern has motivated policymakers and organisations to implement policies that promote higher savings. Traditionally, these policies have focused on using economic levers such as tax incentives and employer-based subsidies for saving.
Fatal attraction? Access to early retirement and mortality
Andreas Kuhn, Jean-Philippe Wuellrich, Josef Zweimüller 25 March 2012
While the retirement age in most developed countries is going up, this column looks at what happens when it goes down. In some countries, those who work in physically demanding jobs are demanding the right to retire earlier. This column finds that people should be careful what they wish for.
Europe and many other parts of the parts of the world face a dramatic demographic transition. Ageing populations will lead to fundamental changes in societies and threaten the sustainability of pension systems. This has prompted the EU to launch a public debate on how to meet this demographic challenge. In a green paper László Andor, EU Commissioner for Employment, Social Affairs and Inclusion, strongly urges an increase in the statutory retirement age. In fact, several European countries have already taken steps to increase the retirement age.
In January the UK government launched an initiative to help the elderly downsize into smaller homes – and provoked the ire of pensioner groups nationwide. This reluctance to downsize to among the elderly perplexes economists, who maintain that leveraging housing wealth can help pensioners maintain a good standard of living on a fixed income. CEPR DP8889 investigates what is behind European pensioners’ puzzling housing decisions.
Retirement age across countries: The role of occupations
Philip Sauré, Hosny Zoabi19 November 2011
In Mexico, the average male worker retires at 75. In Bulgaria, he does so at 58. This column argues that an economy’s composition of occupations matters for its average effective retirement age as the nature of different occupations leads workers to retire at different ages. It suggests the differences in occupational composition explain up to 40% of the observed cross-country variation in retirement age.
Long-standing trends towards earlier retirement and higher life expectancy threaten the sustainability of existing pension systems. What’s more, rising debt levels in the wake of the Great Recession have intensified the need for reforms (see Diamond 2011).