Raising the Age of Retirement to Ensure a Better Retirement by Pierre Pestieau à 1. Introduction For some years now, international organizations have been concerned about the viability of pensions systems and their ability to achieve their objectives. They have two principal concerns: maintaining levels of economic activity among older workers (in clearer language, raising the age of retirement), and enabling retired people to preserve their living standards (in other words, avoiding a return to poverty in old age). This paper shows that the second of these objectives is dependent on the first. With the increase in life expectancy, raising the age of retirement can assure retired persons a suitable standard of living, and also prevent social exclusion among those who have been less fortunate during their working life. The reasoning behind this conclusion is relatively straightforward. It is applicable in those countries where pay-as-you-go (PAYG) pensions are redistributive and constitute the lion’s share of the resources of the elderly, as is the case in countries of old Europe such as Germany, France and Belgium. The ageing of the population in a number of countries will lead almost to a doubling of the dependency ratio. In the context of a PAYG system and excluding, as required by the European stability pact, recourse to borrowing or increased contributions, this will lead to almost a halving of entitlements. There are two ways of reducing these: a reduction of annual pension payments or a raising of the age of retirement, which would both reduce the period of dependence and increase the period over which contributions are paid. Now it would seem that most older people would continue to work longer were they not induced to cease working by a range of benefits which, though at first sight attractive, prove, on closer inspection, to be very costly to society. Once they have understood what is truly at stake, most of them would prefer to work longer to make sure of a still long and comfortable retirement. The rest of this paper is organized as follows. First, it points out that the ageing problem is not only demographic. It shows that the low level of labour market participation among older people is directly explained by considerations arising from tax policy and social security, and indirectly by collusion between governments, employers and trade unions. It then explains why reforms are so difficult, and it argues that a well-designed policy to encourage labour force participation among the old, and to raise the age of retirement in line with rising life expectancy, is socially desirable. à Professor of Economics, University of Lie `ge and Research Fellow at CORE, Delta and CEPR. This paper was originally presented at the 4 th International Research Conference on Social Security ‘‘Social security in a long life society’’. The Geneva Papers on Risk and Insurance Vol. 28 No. 4 (October 2003) 686–695 # 2003 The International Association for the Study of Insurance Economics. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK.