An important element in the debate on pension reform is whether or not a reference age should be retained in the new system. This note aims to contribute to this debate by clarifying certain ambiguities surrounding the concept of retirement age and by discussing the potential implications of implementing a points-based system. We highlight the difference between the impact of reference ages in the current system – which alter the pension system’s scale – and the introduction of benchmarks in the new system, which can play a useful informational role for policyholders. Indeed, recent economic literature highlights the role played by reference points in pension scales, beyond purely financial incentives. This argues in favour of retaining, in the new system, a target that policyholders can refer to. Rather than a single pivot age for everyone, this note argues for introducing a reference standard defined by the achievement of a target replacement rate, for example 75% of final salary. Such a reference would lead to defining an individual full-rate age, tailored to each career. This would also mean returning to the original objective of a pension system: ensuring that living standards are maintained in retirement. Such an age reference could, moreover, be accompanied by new services for policyholders to help them better prepare their retirement decision.
Should there be a reference age in a points-based pension system?
This note discusses the arguments and empirical evidence on whether it is useful to retain a reference age in the new pension system.
Reference Note IPP n°42
Presentation
Key Results
- In a defined-benefit points-based system, the minimum retirement age is no longer a parameter that balances the system. It is a safeguard designed to prevent people from retiring too early with pensions that are too low.
- A pivot age or reference age, in such a system, has no impact on the system’s financial balance, since the scale automatically adjusts in line with life expectancy.
- Recent studies show that policyholders are sensitive, in their retirement decisions, to the existence of a reference standard regarding their retirement age. This argues in favour of retaining a standardised reference in a points-based system.
- A reference defined at the individual level, such as achieving a target replacement rate, would make it possible to define a reference age indicating to policyholders the point at which they can retire with a pension level sufficient to maintain their standard of living in retirement.
