Retirement means the end of the working life of an individual. Oxford dictionary defines the term ‘Retirement’ as- to leave one’s job and cease to work, especially because one has reached a particular age. Thus, retirement is a phase when a person’s life goes an important change with major financial implications. This is a recent concept, with Germany being the first country to introduce mandatory retirement age in 1880’s. Prior to that lower life expectancy meant that people continued to work till death.

An issue which has gained considerable importance in recent times is the argument over what is supposed to be the appropriate retirement age. Ideally, factors to be taken into consideration while determining the retirement age are the general life expectancy of the population, financial well-being, demography of the population etc.

Studies conducted to find the causes behind people taking voluntary retirement found the following reasons:

  1. Financial incentives: People often retire at an age when they are eligible for a pension. Thus, financial incentives play a major role in deciding retirement age.
  2. Existing wealth: Wealth of the individual i.e. financial position of the individual is also a major factor. Studies have found that individuals with sound financial position can actually ‘buy leisure” by retiring early since their finances are enough to secure them a good life- style even after retirement.
  3. Employment status of spouse: Many people are more likely to co-ordinate their retirement with their spouse. Thus, a person is more likely to retire if his/her spouse is retiring or is retired already at that time.
  4. Health: Health is also a major factor affecting retirement. People with poor health are highly likely to retire irrespective of the reasons stated above than people with good health.
  5. Taxes: The tax system in a country is also a major factor influencing retirement.

International Trends:

If we look at the past few years, the general trend in the world, especially the developed countries, is to increase the retirement age. Higher cost of living also forces old people to keep working till their health permits. Hence several European countries have been progressively increasing their retirement ages and are looking to increase it to even 68 years. For example, Ireland’s retirement age is to be raised to 68 years from current 66 years by 2028. Germany will raise its retirement age to 67 years by 2029 from 65 presently. Denmark will increase the NRA for men and women from 66 years to 68 years by 2030.

There are several reasons behind these changes. Due to the developments in the field of medicine, health-care facilities have remarkably improved today. These facilities combined with significant improvements in lifestyles have led to an increase in life-expectancy. People are healthy and are willing to work longer thus delaying their retirements. Hence, increasing the retirement age only seems logical.

But there are financial reasons as well. Because of the large-scale social security benefits system prevalent in such countries, longer life especially post- retirement life means a larger benefit liability for government and employers as these benefits are often in the form of annuities (Joint and survivor or life annuity) rather than lump-sum payments.

Changing Retirement ages around the world:

Source: OECD Pensions at a Glance (2021)

Indian context:

The issue of change in retirement age has been picking up ground in India as well given the likely slowdown in its population growth, increase in the senior population, and growing life expectancy. The other driving factor here is the immediate savings in terms of gratuity and pension payments which it is liable to over the next two years. While employers often have been offering these benefits as a sound strategy to attract and retain talent, these payments form a liability of a considerable size commanding appropriate measures to be taken by employer on a continuing basis to provide for them as and when they arrive.

Actuarially speaking:

While designing a pension, gratuity or PF plan, retirement age is one of the most important assumptions. Retirement age is the age which decides the timing of the payments. However, the effect of retirement is different depending on the manner of payment (lump-sum or annuity) of these benefits.

Effect of increasing the retirement age on:

  • Gratuity:

Since gratuity is a lump sum payment payable to an employee. The most obvious effect of increasing the retirement age would be the deferment of the liability. However, since gratuity is calculated taking into consideration the total service and final salary, assuming an increasing trend in salaries payable, the final salary and service of the employee will have increased and hence, also his gratuity payable.

E.g.: Consider an employee aged 58 years with 20 years of service. If his current basic pay is Rs.20,000. His gratuity works out to be: 15/26*20*20,000 = Rs.2,30,769.

If retirement age is raised to 60 years and his final pay is increased to Rs.25,000, his gratuity with service of 22 years works out to be: 15/26*22*25000 = Rs.3,17,308. Thus, the employer ends up paying more at the time of retirement.

  • Pensions:

Pension is paid to an employee after his retirement usually in the form of a life annuity. Hence the timing of retirement does make a difference to the duration of these payments. With life-expectancy increasing, the duration of these annuity payments is also increasing. Hence increasing the retirement age would not only decrease the number of these annuity payments as they would start later but also buy some time for the employer to provide for them.

  • Provident fund:

Provident fund is a very prominent form of employee benefit. Out of the 12% contribution made by the employee to match the employee contribution of 12% of the basic salary, 8.33% goes to the provident fund the rest going to pension fund (EPS). In many cases where pension benefit is not provided the entire contribution goes to the PF. Hence the employer’s liability will certainly increase because of an increase in retirement age as he will be contributing for a longer period.

To sum it up:

An increase in retirement age would certainly help the employers to plan better to meet their benefit liabilities. However, on payment day the employers would most probably end up paying more. But the silver lining is that the employer would also receive additional service from the employee thereby adding to the value of the company and compensating for the increased costs to the company. The company will also save on cost of training.

While looking at the benefits of increase in retirement age one also must consider its possible disadvantages. With increasing unemployment in the country and a favorable population demographic structure in terms of work-force-population ratio and dependency ratio, an increase in retirement age might add to the existing problems thereby questioning the very legitimacy of such a move.