Reduction of retirement age should be handled well to succeed

Early this month, an MP hinted at drafting a Bill that seeks to reduce the maximum retirement age from the current 60 years to 55 years as a measure to create employment for the youth.

This revelation comes months after the Salaries and Remuneration Commission drafted a report with, among other measures, a recommendation to slash the maximum retirement age as a way of reducing the ballooning wage bill. The proposal to reduce the maximum retirement age, though noble, would turn out to be a double-edged sword.

First, as envisioned, through early retirement many unemployed graduates or youths will get jobs. Conversely, reducing the maximum retirement age will financially disorganise those currently in employment who have planned to retire at the age of 60 since they will have built up less retirement capital.

Certainly, this category of civil servants needs even more cash to last for a longer period.

Interestingly, this new shift comes after the government in 2009 effected an increase in the retirement age for public servants from 55 years to 60 years and announced a new contributory public service scheme.

The drive for raising the retirement age then was to reduce the increasing number of new pensioners, give the government time to plan for resources to fund the new pension scheme and allow room for introduction of a new contributory public service scheme.

The government must have adequate financial resources to pay for pensions. But with the liquidity crunch, early retirement may prove to be an uphill task worth postponing.

While this may prove to be a hard puzzle for policy makers, Kenya’s situation is not unique. The Zambian government appears to have taken the route Kenya took in 2009 when it raised the retirement age.

In June 2013, the Zambian government proposed an increase in the retirement age by ten years to 65 years from the traditional 55 years, arguing that 55 years was low and that it led to wastage of human resource.

Pundits, however, argued that with the prevailing high rate of unemployment, the intention went beyond the reduction of human resource wastage to enable the Zambian government restructure its pension scheme on the backdrop of increasing life expectancy. The government is still engaging policy makers to address the rising concerns.

In Kenya’s case, only those who were scheduled to retire this year at 60 will not be affected by the proposed draft Bill. This implies that the group that follows this lot will have to either look for other jobs to fund the deficit in their retirement savings or risk becoming destitute when they retire with insufficient savings.

Regardless of which way the sword cuts – creating employment opportunities for the youth or utilising the human resource of those above 55 years – what is clear is that the case for the reduction of the retirement age against the current unemployment rate is overwhelming.

Nevertheless, there are certain preconditions that need to be in place for this to deliver a win-win situation. It would not be interesting to see retired workers become destitute due to insufficient savings.

Conversely, it would be encouraging to provide jobs for the youth when they are still young and active so they can also have adequate time to plan and save for their retirement.

To strike a balance before the proposed retirement plan is adopted, the following recommendations should be explored. First, the government should establish the average life expectancy in the country.

If it is below 50 years, then this may inform some consideration for the reduction as it would imply that many workers could die before reaching 60. Reducing the maximum retirement age would, therefore, create adequate time for workers to enjoy retirement.

The next step will be to explore and determine the average amount a worker who is 55 will get in retirement from all available sources – pensions, social security, retirement accounts and work – and whether this will be sufficient to give him a better lifestyle at the prevailing rate of inflation and with the high cost of living.  

If this does not give workers a better lifestyle, the government should critically examine other factors before making the decision to reduce the retirement age.

Lastly, the government should also explore the option of adopting the graduated retirement model where those who have attained the age of 55 can be allowed to work, but on a contract that ends when they attain the age of 60. This contract programme should be flexible to allow the retirees to gradually adjust to life in retirement.

Opiyo is a training manager and coach with Tolerance Employee Financial Advisors Ltd.