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Saturday, 1 June 2013

Raising the Retirement Age in Zambia

By Chola Mukanga 

The question of what the minimum statutory retirement age should be has sparked debate in recent weeks. This follows the announcement by the President that new government will seek to increase the minimum pensionable age from 55 years to 65 years. The new minimum state pensionable age would remain mandatory to the public and private sectors, with all employees continuing to make their contributions to NAPSA through their employers, as set out under existing legislation. Given the centralised and heavily regulated nature of the current pension system, it was inevitable that the new policy direction on state pension would spark debate.  

The argument
The Government’s proposal appears to be based on the belief that increasing the minimum state age of retirement is absolutely necessary because the current age limit discriminates against those who are willing to work longer. President Sata explicitly noted that “people still wanted to continue working even after they had retired hence the need to up the retirement age to allow the ones that want to continue working to do so”. This is not only fair, it is argued, but also makes economic sense. Increasing the age limit will allow experienced employees to continue contributing to national economic life. In short, the Government’s argument is based on fairness and preventing lost output.
The argument is particularly strong with respect to specialised professions. In such professions, experience is particularly importance given that much of the knowledge is “tacit”. Tacit knowledge is personal knowledge embedded in individual experience and involves intangible factors, such as personal beliefs and perspective. This form of knowledge is hard to articulate with formal language because it contains subjective insights, intuitions and hunches. It is difficult to pass on to the next person but is very critical to organizations, especially Government. In most technical areas, such knowledge encompasses the kind of informal and skills often captured in the term know-how. For example, a craftsman develops a wealth of expertise after years of experience. But a craftsperson often has difficulty articulating the technical or scientific principles of his craft. Highly subjective and personal insights, intuitions, hunches and inspirations derived from bodily experience fall into this dimension. When high qualified individuals are retired early, the organisational knowledge pool is depleted, unless systems exist for how a proportion of such information is systematically passed on. Increasing the minimum pensionable age would help safeguard against such dangers.
It is interesting though that in making his argument the President did not mention perhaps the strong case for change - the need for “sustainability”. Some have argued that the current pensionable age makes it difficult for Zambia to maintain an adequate pension system. Increasing the pensionable age would lead to greater solvency. As people work longer a higher retirement age would increase revenues coming into the pension system. Greater solvency may also benefit individuals if the larger pension fund is coupled with proper and innovative management of the funds. The scale of this impact is likely to be immediate. Increasing the retirement age tomorrow will mean that for the next 10 years no one will retire and therefore no new retirees will be paid for the next 10 years, but there will be greater revenue pouring in! This is likely to translate in a huge reserve of funds which can make a substantial impact, if appropriately channelled. For example, a larger pool of funds may enable NAPSA (or government) to engage in supporting “normal profit” social enterprises – helping widen access to credit and other things that would in the long term empower Zambians and deliver “more money in your pocket”.
Retirees would also benefit from getting potentially larger monthly repayments, not only from working longer, but also because more money may be available in the pool enabling the system to be much more generous. This point that was echoed recently by the Pensioners Association of Zambia (PAZ) who noted a higher mandatory retirement age should be accompanied with a revision of monthly payment for retirees currently ranging between K0.1m and K1m because “when you consider what retirees are getting and compare it with the food basket, it is nothing to talk about as the food basket for a family of six is pegged at K2.1 million”. PAZ also highlighted the need for such measures to also include dedicated “medical services”.  

Illusionary benefits
The benefits alluded to by Government are certainly real, the problem lies with the scale of the benefits. Taking the “fairness” point, as an example, how many people are prevented from working beyond the age of 55 years? At this point it should be noted that the current provisions are a minimum requirement. There’s nothing preventing the employer from retaining employees they genuinely regard as invaluable. The incentives of course may well be tilted towards retiring the current employee because employers may not be keen to “invest” in older people given the higher likelihood that they “exit” any minute. Some may also regard older folk as less likely to be loyal since they are not in it for the long haul, although there’s much be said for their greater affinity to the company they have been with for many years. The problem is that these incentives are likely to vary by the nature of the business. Certainly Government should not need legislation to compel itself to change the attitude towards its employees, except in cases where additional legislation is needed.  
More worrying is that the Government’s policy appears self defeating financially. Though Government may save money by potentially making fewer repayments to retirees, it may also pay more wages than would have been the case with younger workers. Older employees are likely to be more expensive than new entrants. In most cases, they are likely to be at the top of their income brackets and over the years would have undoubtedly received progressive salary increments. It follows that raising the minimum retirement age could well run counter to the current policy direction of reducing Government expenditure and channelling the scarce resources to more pro-poor areas.
The other point is that even if it where the case that many people are currently being unfairly disadvantaged it is likely to be a proportion. This becomes obvious when we consider that in Zambia life expectancy is below 40 years. Although we know very little of how this varies across formal and informal employment the average life expectancy for both camps is likely to remain below the current retirement threshold because of wide spread of HIV / AIDs, poor health and adequate social security systems. This tempers any likelihood that a higher minimum retirement age would lead to people working longer translating in greater economic output.
Lower life expectancy also means that people have less time on earth to enjoy their pension. Increasing the retirement age would therefore lead to people dying without enjoying any sort of retirement. This is why in developed countries the retirement age is always below the average life expectancy, not above it. For example, Sweden’s statutory state pension age ranges between 61 and 70 years, with a life expectancy of 80 years. The UK’s current state pension age is 65 years with life expectancy of 79. Indeed nearly all OECD countries have pensionable ages lower than their life expectancy.
The Government’s proposal may also lead to the problem of worsening inequality over time. Raising the statutory retirement age is fine for those who live long and have high powered jobs (the so called new “middle class”), as they not only tend to live longer they also manage to live longer healthily. It is not good for those on lower paid jobs and those who work manually throughout their lives. Many of our people (employed and unemployed) are living in extremely deplorable conditions, that one cannot reasonably expect them to live a disability-free life beyond the age of 40. Increasing the statutory retirement age in the absence of a revamped social safety net will simply mean more people will even die before they reach the statutory retirement age, than is currently the case. This has huge impacts on their children and children’s children due to diminished family inheritance.
Beyond these issues there’s a genuine concern regarding the potential impact on employment, particularly the likelihood of a higher retirement restricting potential entrants into the jobs market. Encouraging older people to stay in work will first and foremost make it difficult for elderly workers out of employment to find employment. This is because with fewer jobs around, those jobs which could be done by the elderly will be taken by those who are equally older. Confronted with a choice between older folk, employers may be forced to keep those who are already employed. This will further widen inequality among that age group because older folks already employed will be financially superior to those out of employment.
By far the most significant impact would be on youth unemployment. There’s currently vast shortage of skilled labour opportunities. One of the pressing economic challenges is that young graduates are struggling to find employment, and crucially, even those who do find employment often find themselves “misallocated” in occupations where their skill does not match their qualifications. Some end up working in casual employments with poor safety and no long term benefits.  Government is the biggest formal employer. Its decision to hold onto to older folks will limit the opportunities available and may even add to unemployment. This is particularly possible because unlike older folks who may have worked for some time and upon retirement choose to use their access to capital to foster entrepreneurial activities, the skilled but hungry youths would be in a desperate position. In short, Government would be restricting employment opportunities in government for the next 10 years, over and above what would be happening with austerity measures to curb mismanagement and other banes.

There are better alternatives 
One of the difficulties in assessing the merit of the Government’s proposal is the appropriate counterfactual that underpins its policy position. By counterfactual we mean the world against which the policy intervention is being compared against. Is it the ‘do-nothing’ or is it some credible ‘next alternative’ policy? Standard policy appraisal must compare the preferred policy option against the ‘do-nothing’ and assess whether other competing options are superior. A cursory review of alternative policy formulations would lead one to conclude that there are plenty of policy proposals that would achieve superior outcomes without forcing people to work up to 65 years.
One credible alternative is for Government to introduce internal “non-legislative” standards, along the lines hinted above. This would take the form of Government making it clear as part of its contractual arrangement with employees that it would not retire people based on the minimum threshold criteria. Given that such a threshold is not a maximum it would devise clearly internal mechanisms to judge who should be retired after that threshold is crossed. The legislative option only becomes necessary in those occupations where “maximum” clauses apply (e.g. for military personnel).  
Another idea may be to retain the current proposal as an option available to civil servants only. This would mean that those who pursue further education late in life and stay healthy would still be able to contribution to the economic life of the nation. This has the downside of increasing an already bloated Government. If this idea was to be taken forward it would need to come with other public sector reforms, especially in relation to cutting wasteful expenditure.
There’s also the pro-active alternative of Government focusing the “re-skilling”. For example, Government could initiate an empowerment programme for retirees. Government could introduce a robust programme to transform those retired with their "vast experiences" into business entrepreneurs creating jobs for the skilled and semi-skilled youths with the help of government grants and their own retirement packages as liquidity. This would appear a better alternative than creating employees for life. In some ways re-skilling could form part of any option. Indeed, the option may even be augmented so that the retirement age is optional within a feasible range, similar to the Swedish model noted above.  
Regardless of which alternative is preferred, what is clear is that the case against raising the retirement age under the current conditions appears overwhelming. There are certain preconditions that need to be in place for this to deliver a win-win situation for Zambia. The key is to focus on life expectancy. Government must first increase the health levels of Zambians and then let that drive the quest for higher minimum state pensionable age. Similarly, there’s need to first tackle youth and elderly unemployment by creating greater opportunities for entrepreneurship opportunities, through access to capital and appropriate “up skilling” of individuals. When these things are achieved Government would then be in position to ensure legislation is introduced that commits government to setting the minimum retirement age in line with life expectancy – once the age of 55 years is surpassed.  
In the meantime, there are a lot of innovate approaches that Government can adopt to harness expertise from those who are on the verge of retiring. Chief among them is ensuring retirees are reminded that retirement is not necessary the end of a journey, but it is an opportunity to use their vast experience to contribute towards entrepreneurship and genuine job creation. However, this must be accompanied by widening availability of credit and putting in place appropriate training programmes.

Copyright: Zambian Economist, 2011

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