Raise the retirement age? This has long been a topic of debate around the world. Rising life expectancy combined with an aging population—which, in pay-as-you-go and hybrid systems, places significant pressure on fiscal spending, given the decline in contributions from the young working-age population to finance the pensions of a growing population of retirees—are two of the main reasons behind the debate. Even in the case of the individually funded system that has been in place in Chile until now, the need to contribute for more years in order to receive a better pension is an important element in the public discussion.

However, things don't seem to be that simple. An analysis by the World Economic Forum reveals some hidden costs associated with the idea of postponing the retirement age. From the perspective of fiscal sustainability, the idea of retiring later makes a lot of sense. But when analyzing the efficiency of welfare distribution—in part because it tends to distribute benefits to populations that need them least— those who retire later generally belong to groups with better health and education, more productive careers, and greater financial resources, while those who tend to retire earlier have lower life expectancies. “Therefore, the strongest incentives divert resources away from people who not only have fewer resources but also suffer from poorer health,” the analysis states.

With this study, which aims to highlight the redistributive costs of raising the retirement age, the WEF proposes new elements for the analysis to strike the difficult balance between providing better pensions to those who need them most—who tend to be those who retire earlier—and the need to maintain sustainable fiscal spending.

Although the WEF’s analysis does not focus on a system with a predominantly individual-account component—such as the one that has characterized the Chilean pension model to date—it does it does provide important insights for the ongoing discussion in the country.

You can view the analysis HERE.