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The income structure of people over 65 in the world

11/12/2019

Low interest rates and population aging put pressure on the pension systems in the OECD countries. Reforms are necessary as the ratio between the number of persons aged 65+ and the number of people in the working-age population increases. As in Japan, low pension benefits might stimulate seniors to continue to work after 65. However, the risk is that more elderly could end up below the poverty line, at 50% of the median income.

TRANSCRIPT // The income structure of people over 65 in the world : November 2019

THE CHART OF THE MONTH

François Doux

In this Chart of the Month, we will be talking pensions and the income profile of the over-65s.

Raymond Van Der Putten, hello.

Raymond Van Der Putten

Hello.

François Doux

So, what are the different types of income for over-65s that you have shown on this chart?

Raymond Van Der Putten

For seniors, the main source of income is the state pension, this is the blue line. After that we have occupational pensions in green, and then income from investments in orange, and work in red.

François Doux

This concerns in particular the self-employed.
So how have you ranked countries from left to right on this chart?

Raymond Van Der Putten

They are ranked by importance of the public pension system. On the left we have countries where the public system is the only pension system. This is particularly the case in the eurozone. As we move to the right, the public pension is more a basic pension topped up by additional income from occupational pensions. This is the case in the English-speaking countries, and also in the Netherlands.

François Doux

These two systems are facing long-term viability issues, why?

Raymond Van Der Putten

At the moment, occupational pensions are suffering from rather low interest rates. These have made it very difficult for them to generate sufficient returns to cover future income and they have had to increase contributions as a result.

On the left-hand side, the problems will play out over the next decade or so. At the moment there are three people in the working–age population for every pensioner, but in ten years this will drop to two people. If we want to keep pensions at the same level, contributions will have to rise by 50%, which is not realistic.

François Doux

So what are the solutions to these problems?

Raymond Van Der Putten

Well, there are not many solutions. If we want to keep contributions at the same level and benefits also, we have to raise the retirement age. Some countries – the Netherlands, Germany, Italy – have already started to do that.

France wants to keep the minimum retirement age unchanged, but will be introducing incentives for people to work longer. Japan is an interesting example. There are already only two workers per pensioner, but pension spending is around 15% of GDP, similar to the level in France.

What is Japan’s secret? Pensions are very low. This creates an incentive for older people in Japan to carry on working after retirement age. On average, 40% of pensioners’ income there comes from employment, compared to 5% in France.

François Doux

So, to conclude, Raymond Van Der Putten, the right-hand scale shows the risk of poverty for the over-65s. We can see that for France we are at the upper end, so the risk is low.

Whilst in Japan, which you have just been discussing, the risk is high.

Raymond Van Der Putten

Yes. And that is the danger. With the pension reforms, people start to work longer. In this case, the red column gets much bigger. And we can see in this chart, where the red column is tall, the risk of poverty is also high.

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