Free market should decide retirement age

Updated: 2014-04-16 06:47

By Li Kui-wai (HK Edition)

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Decades ago the former colonial government decided that civil servants should retire at the age of 60, while members of the disciplinary forces would retire earlier. That was the time when life expectancies were shorter, and Hong Kong had a large population of young people - particularly after the 1950s. Today, the population mix and health factors have changed the situation considerably. People's life expectancies are much longer. The elderly population is growing, while the birth rate remains low. Many elderly people have put their money into funds, saved hard or bought property for their retirement. But there are still many who may not have enough money.

The problem for the elderly is not so much about wealth, but the uncertainty of age. For any person retiring today, the uncertainty is whether the money a person has will last until the end of his/her life. While welfare advocates would simply ask for more money for the elderly, the availability of money cannot reduce the risk and uncertainty. It is often common for elderly people to say they have insufficient money for retirement. Social welfare cannot solve this problem entirely.

There are various economic ways to combat the rising number of elderly people. Importing labor, especially young professionals, could contribute to tax revenue. Expanding Hong Kong's economic capacity is another possibility. A larger economic pie will generate more employment and better paid jobs. Higher paid workers could accumulate more wealth for their retirements. A third possibility is to raise taxes. But this would also be a disincentive to businesses and could actually reduce overall tax revenue. All these suggestions would have different consequences. Their implementation will require time and also be controversial.

Free market should decide retirement age

The free-market mechanism may be an alternative method. It could work more transparently and bring mutual benefits. The decision to retire at 60 is more of an arbitrary choice than one governed by people's health. People are living longer. It is common that by the age of 60 or so, a person will no longer be the family's major bread winner. Using the theory of economic rent, a person could still work and remain employed if his wage was lowered. How far the wage would be lowered could be determined by the market or some sort of mutual agreement between the employer and employee. Or a reverse salary scale could be instituted. For example, wages could be reduced by 10 percent every year with a cap of 50 percent. Hence by the age of 65, the employee would be getting half the salary he was getting at the age of 60.

The theory of economic rent allows people to work longer. It allows workers, especially skilled ones or experienced professionals, to keep contributing to society. It allows employers to keep an experienced worker at a reduced salary - although the reduced salary would be accompanied by a reduction in their workload or responsibility. It allows the workers to decide whether they will remain in "employment" or retire earlier. This would also depend on their family situation, health and so on. It allows flexibility in the retirement age, and adjustment between employment and retirement can be more gradual than simply retiring at 60. This surely would promote a better "employer-employee" relationship. Both will benefit from the economic rent theory in deciding their retirement choices. Indeed, one could consider retirement as a process rather than an abrupt decision.

The decision to retire would depend on the skill of the worker, on the prospect of the business and potential recruitment of other workers. This would be attractive to skilled workers. It will in turn encourage workers to gain better skills in their careers so they can be useful in old age. For the government or public sector, the theory can still be applied because it is ultimately a choice for both parties - provided the system is transparent. Other conditions can be imposed. For example, retirement should not be longer than 65 years of age, but health checks could be required to see whether the person is in suitable health.

Many would argue that this would restrict the employment possibilities of younger workers. This may not be the case, depending on the business cycle, or the worker's profession. For example, during an economic recession, workers will be made redundant anyway. For unskilled jobs, such as saleswomen in retail shops, employers may prefer to hire younger women on similar salaries. The solution lies in whether the employment pool is expanding. If more jobs are available, delayed retirement may even lead to more employment for young people. For example, for skilled jobs, an employer could hire a younger worker early so he can learn skills from older workers before they retire. Unless there is a clear case of replacing workers, namely the hiring of one worker and the firing of another, delayed retirement could complement the work of younger employees.

Of course, there is always competition for jobs. The crucial factor is a person's skill, expertise, experience and knowledge. Equipped with these attributes, a worker or employer should be given a chance to decide whether he or she would prefer to work. Retirement then becomes a personal choice and depends on a person's productivity.

For society, there would be more employed workers, and since employees with delayed retirements still earn salaries, there is less need for social welfare. Government funds could be saved for other purposes. Furthermore, these delayed retirees would have more money when they retire. It is even possible their delayed retirements will lead to lower insurance payments. The fact they are still employed would imply they still have good health.

The author is associate professor of the Department of Economics and Finance at City University of Hong Kong.

(HK Edition 04/16/2014 page9)