Delayed Pension Reforms May Hit Young Harder Than The Old, IMF Warns Policymakers To Act Sooner Than Later

Now is the time for countries to seriously consider pension reforms or be ready for a negative impact on their long-term growth. The International Monetary Fund (IMF) emphasises the urgency of timely reforms by policymakers in aging economies in its World Economic Outlook (WEO) 2025 report.

The report notes the increasing number of ageing economies having more people aged 65 and older compared to the younger individuals. The changing demography suggests that, in the future, there will be more seniors depending on a smaller workforce of young people to support them. Therefore, it advises that countries should plan and implemented pension-related reforms to address the challenge.

It suggests, “increasing statutory retirement ages, increasing contributions from workers or firms, and reducing benefits to pensioners.”

Ageing Population Shrinks Labour Force:

The report underlines that ageing population cannot actively engage in work. This means a reducing labour force, less output, and declining growth in consumption and investment in the future years.

The savings and consumptions in aggregate also changes due to different habits of young workers and retirees. In addition to this, longevity of life also pushes people for ‘precautionary saving’.

The larger impact could be seen on interest rate, which tends to move downward due to lower investment, which is due to higher capital to labour ratio. At the same time, pension, and healthcare related spending increase on account of increasing number of retirees. With increasing elderly population, shrinking labour force, lower consumption and tax revenues, public debt to GDP ratio can move upward.   

Three Instruments For Pension Reforms And Improving Debt To GDP Ratio

A high amount of social security contributions affects the disposable income of the labour force. If the retirement age is increased, it would mean a smaller number of retirees compared to the workers. Further, a decline in the wage replacement rate of pension would mean a reduction in pension benefits. According to the report, these three instruments will also have an indirect behavioural effect on the economy.

The analysis projects that ageing would reduce the consumption among young and old both, in absence of any reform. 

Single Vs Combination Of Instruments:

While consumption decreases, policy reform can ease the burden of consumption losses by spreading it across generations. It would be possible by using a mix of measures and by impending them early.

So, if only retirement age measure is adopted for pension reform, it would require increasing retirement age by six-years. This is when the reform is implemented immediately. However, adopting a mix of measures would require only two years increase in retirement age.

The report emphasised that postponing these reforms means a higher aggregate consumption losses and larger measures needed later on. For instance, ageing induced rise in public debt can be managed by increasing retirement age by six years but it the decision is postponed for 10-years, the required increase in retirement age will be eight years.

At the same time, it highlights that the young will have to experience consumption losses more than the older population.   

The report highlights the urgency for policymakers to act on pension-related reform sooner than later to minimise economic turmoil. It suggests using a combination of measures to equitably distribute the burden across generations.