## Worry-Free Retirement

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**Canonical URL:** [Worry-Free Retirement](https://www.imf.org/-/media/files/publications/fandd/article/2024/09/cafe-econ-productivity.pdf)

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### Situation for retirees today
- Compared with 30 or 40 years ago, many of today’s retirees are not as well positioned financially; previous generations often benefited from a strong economy, reliable retiree medical and social security systems, and a big run-up in housing prices.
- Demographic shifts: falling fertility and rising longevity mean populations are aging much more rapidly.
- Social Security in the United States “will run short within 10 years.”
- Longevity implies both a “silver dividend” (longer, often healthier lives) and a larger number of frail elderly people requiring care.
- Economic growth is likely to slow as older people draw down assets; the global balance of power is expected to shift from older, richer developed economies toward the emerging world.

### Longevity, health, and productivity
- Longer lifetimes yield a longevity dividend only when accompanied by health improvements.
- When people remain healthier for longer and continue to work in later life, this:
  - boosts productivity and economic growth;
  - provides additional wealth in the form of millions more healthy productive person-years.

### Retirement saving, pension design, and labor market change
- Workplace and retirement systems have changed: employer-provided defined-benefit plans have declined, and labor mobility has increased, making lifetime single-employer careers less relevant.
- Many workers are now more on their own for retirement planning.
- Governments in some countries encourage saving via tax-qualified savings where workers can put pretax money into funded retirement accounts.
- Distributional concern: those who can save are usually in the top half of the income distribution; the bottom half tend to have less money to save.
- For lower-paid workers, a nation’s social security system often replaces prere­tirement income reasonably well, while private savings are more important for higher earners.
- Encouraging saving faces behavioral barriers: “saving is not fun,” while spending is rewarding.
- Example of behavioral policy innovation: a UK government–sponsored lottery saving system—deposit a pound, earn a lottery ticket for a monthly draw—on average yields about the same as interest in a regular savings account but adds big-prize incentives to make saving more attractive.
- Governments should push longevity awareness so people understand how long they might live and the associated longevity risk.

### Financial literacy, risks, and regulation
- Lack of planning and limited understanding of longevity risk are common:
  - The Health and Retirement Study, launched in 1992, surveys people aged 50 and over and follows them every two years until they die, merging Social Security records, benefit records, and medical records.
  - Findings: a substantial number of older individuals never planned for retirement, never saved for retirement, and were unaware of their longevity risk and chances of living to 80, 90, 100 (or even longer).
  - People who do not understand tail risk of very long life probably won’t save enough and tend to retire too soon.
- Financial literacy matters:
  - In the US, 21 states now mandate financial literacy classes in high school; young adults who take those classes are much better at planning, budgeting, and saving for retirement.
- New financial technologies and products create predatory and fraud risks:
  - Younger generations focused on apps can be exposed to cryptocurrency and other complex financial products about which they are underinformed, and can lose a lot of money.
  - Older populations also face mounting fraud.
- Researchers and policymakers should communicate more: academics can inform policymakers, and policymakers have questions academics can study and evaluate.

### Practical advice and policy recommendations
- Individual-level advice (Barbara Judge’s mantra adopted by Olivia S. Mitchell): “Work longer, save more, and expect less.”
  - Stay in the workforce as long as health permits.
  - Increase savings to guard against longevity risk.
  - Adjust expectations downward about retirement consumption where necessary.
- Policy actions suggested:
  - Promote and design incentives to make saving more attractive (behavioral tools such as lottery saving schemes).
  - Expand and strengthen financial literacy education (consistent with the example of 21 states mandating high school classes).
  - Increase longevity awareness campaigns so people understand life expectancy and tail risks.
  - Ensure researchers and policymakers engage more closely to translate evidence into effective retirement policy.

*Source: Interview with Olivia S. Mitchell, F&D, September 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/cafe-econ-productivity.pdf_