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Raising the Retirement Age in Zambia

Raising the Retirement Age in Zambia

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Published by Zambian-Economist

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Published by: Zambian-Economist on Nov 01, 2011
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Economic perspectives on Zambia 
The question of what the minimum statutory retirement age should be has sparked debate inrecent weeks. This follows the announcement by the President that new government willseek to increase the minimum pensionable age from 55 years to 65 years. The newminimum 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 ofthe current pension system, it was inevitable that the new policy direction on state pensionwould spark debate.
The argument 
The Government‟s
proposal appears to be based on the belief that increasing the minimumstate 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 al 
low the ones that want to continue working to do so”.
This is not only fair, it isargued, but also makes economic sense. Increasing the age limit will allow experiencedemployees to continue contributing to national economic life. In short, the Government
argument is based on fairness and preventing lost output.The argument is particularly strong with respect to specialised professions. In suchprofessions, experience is particularly importance given that much of the knowledge is
Tacit knowledge is personal knowledge embedded in individual experience andinvolves intangible factors, such as personal beliefs and perspective. This form of knowledgeis hard to articulate with formal language because it contains subjective insights, intuitionsand 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 ofinformal and skills often captured in the term
. For example, a craftsman developsa wealth of expertise after years of experience. But a craftsperson often has difficultyarticulating the technical or scientific principles of his craft. Highly subjective and personalinsights, intuitions, hunches and inspirations derived from bodily experience fall into thisdimension. When high qualified individuals are retired early, the organisational knowledgepool is depleted, unless systems exist for how a proportion of such information issystematically passed on. Increasing the minimum pensionable age would help safeguardagainst such dangers.It is interesting though that in making his argument the President did not mention perhapsthe strong case for change -
the need for “sustainability”.
Some have argued that the currentpensionable 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 ahigher retirement age would increase revenues coming into the pension system. Greatersolvency may also benefit individuals if the larger pension fund is coupled with proper andinnovative 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 retireand therefore no new retirees will be paid for the next 10 years, but there will be greaterrevenue pouring in! This is likely to translate in a huge reserve of funds which can make asubstantial impact, if appropriately channelled. For example, a larger pool of funds mayenable 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”.
Economic perspectives on Zambia 
Retirees would also benefit from getting potentially larger monthly repayments, not only fromworking longer, but also because more money may be available in the pool enabling thesystem to be much more generous. This point that was echoed recently by the PensionersAssociation of Zambia (PAZ) who noted a higher mandatory retirement age should beaccompanied 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
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 currentprovisions are a
requirement. There‟s nothing preventing the employ
er fromretaining employees they genuinely regard as invaluable. The incentives of course may wellbe 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 withfor many years. The problem is that these incentives are likely to vary by the nature of thebusiness. Certainly Government should not need legislation to compel itself to change theattitude towards its employees, except in cases where additional legislation is needed.
More worrying is that the Government‟s
policy appears self defeating financially. ThoughGovernment may save money by potentially making fewer repayments to retirees, it mayalso pay more wages than would have been the case with younger workers. Olderemployees are likely to be more expensive than new entrants. In most cases, they are likelyto be at the top of their income brackets and over the years would have undoubtedlyreceived progressive salary increments. It follows that raising the minimum retirement agecould well run counter to the current policy direction of reducing Government expenditureand 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 unfairlydisadvantaged it is likely to be a proportion. This becomes obvious when we consider that inZambia life expectancy is below 40 years. Although we know very little of how this variesacross formal and informal employment the average life expectancy for both camps is likelyto remain below the current retirement threshold because of wide spread of HIV / AIDs, poorhealth and adequate social security systems. This tempers any likelihood that a higherminimum retirement age would lead to people working longer translating in greater economicoutput.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 sortof 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 havepensionable 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 workmanually throughout their lives. Many of our people (employed and unemployed) are living in
Economic perspectives on Zambia 
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 arevamped social safety net will simply mean more people will even die before they reach thestatutory 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 t
here‟s a genuine concern
regarding the potential impact onemployment, particularly the likelihood of a higher retirement restricting potential entrantsinto the jobs market. Encouraging older people to stay in work will first and foremost make itdifficult for
elderly workers 
out of employment to find employment. This is because withfewer jobs around, those jobs which could be done by the elderly will be taken by those whoare equally older. Confronted with a choice between older folk, employers may be forced tokeep those who are already employed. This will further widen inequality among that agegroup because older folks already employed will be financially superior to those out ofemployment.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 thatyoung 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 andno long term benefits. Government is the biggest formal employer. Its decision to hold ontoto older folks will limit the opportunities available and may even add to unemployment. Thisis particularly possible because unlike older folks who may have worked for some time andupon retirement choose to use their access to capital to foster entrepreneurial activities, theskilled but hungry youths would be in a desperate position.
In short, Government would berestricting employment opportunities in government for the next 10 years, over and abovewhat 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 itsome credible „next alternative‟ policy? Standard policy appraisal must compare the
preferred policy option
against the „do
nothing‟ and assess whether other 
competing optionsare superior. A cursory review of alternative policy formulations would lead one to concludethat there are plenty of policy proposals that would achieve superior outcomes withoutforcing people to work up to 65 years.One credible alternative is for Government to introduce
internal “non
ative” standards,
along the lines hinted above. This would take the form of Government making it clear as partof its contractual arrangement with employees that it would not retire people based on theminimum threshold criteria. Given that such a threshold is not a maximum it would deviseclearly internal mechanisms to judge who should be retired after that threshold is crossed.The legislative option only becomes necessary in those occupations where
 clauses apply (e.g. for military personnel).Another idea may be to retain the current proposal as an option available to civil servantsonly. This would mean that those who pursue further education late in life and stay healthywould still be able to contribution to the economic life of the nation. This has the downside ofincreasing an already bloated Government. If this idea was to be taken forward it would needto come with other public sector reforms, especially in relation to cutting wastefulexpenditure.There
s also the pro-active alternative of Government focusing the
skilling”. For example
,Government could initiate an e
mpowerment programme for retirees. Government could 

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