Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / Why Retiring Later Boosts GDP More Than You Think
Transcript
- Lucas: Denmark just passed a law that will push the state pension age to 70 by 2040, automatically adjusted for gains in life expectancy. And a growing number of economists think this is actually the single most powerful lever for boosting GDP per capita in an aging society. Luna: More powerful than immigration or raising the birth rate? That's a strong claim. Lucas: It is. And I should say — a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's the small contributions that add up and let us stay ad-free. So Denmark — indexing retirement age to life expectancy. Walk me through the math. Lucas: Sure. Denmark's current retirement age is 67. By 2040 it'll be 70. The key insight is that if people work one year longer, GDP per capita increases by roughly one percent — not because productivity jumps, but because the labor force expands relative to the total population. Luna: So it's a pure denominator effect. More workers, same number of retirees. Lucas: Exactly. And the old-age dependency ratio — people 65-plus divided by people 20 to 64 — drops by about two percentage points for every year you delay the retirement age. That's huge for pension math. Luna: Two points per year — so a three-year delay drops the ratio by six points. That's like adding a whole cohort of younger workers without needing higher birth rates. Lucas: Right. And Denmark is the poster child for this because they made it automatic. The retirement age is linked to life expectancy at age 60, so it rises gradually. No political fight every few years, no protest wave like in France. Luna: France is the counterexample. President Macron raised the retirement age from 62 to 64, and the streets erupted. Lucas: Massive protests. But the French reform actually only shifts the dependency ratio by about four points over a decade — roughly half the effect of Denmark's three-year increase. And it's done as a one-off, not indexed. Luna: So the politics are brutal, but the economics are clear. Why don't more countries just index like Denmark? Lucas: Because it's politically easier to kick the can. The U.S. Social Security retirement age is 67 for anyone born after 1960, but it hasn't changed since 1983. Life expectancy has risen by about five years since then. Luna: So the U.S. is leaving GDP and fiscal stability on the table. Lucas: A 2019 study from the Center for Retirement Research at Boston College estimated that raising the full retirement age to 70 would reduce Social Security's long-term shortfall by about 30 percent — without cutting benefits. That's three trillion dollars in present value terms. Luna: Three trillion. And that's just the fiscal side, not the GDP boost. Lucas: Right. The GDP effect is additive. More workers means more output, more consumption, more tax revenue. The IMF did a simulation in 2023 showing that if advanced economies raised retirement ages by two years on average, GDP would be 2 to 3 percent higher by 2035. Luna: That's not nothing. But there's a distributional issue — people in physically demanding jobs can't always work longer. Lucas: That's the genuine equity concern. Denmark addresses it with an 'early retirement benefit' for people in arduous occupations — they can retire at 66 with a slightly reduced pension. But the average person in a desk job lives three to four years longer in good health than someone in construction. Luna: So the same retirement age is actually regressive. The healthier, wealthier workers live longer and collect more benefits. Lucas: Exactly. Some economists have proposed tying retirement age to occupation or socioeconomic status. But that gets administratively messy — how do you define 'arduous'? Luna: Germany tried something similar with their 'pension at 63' option, and it ended up being used mostly by white-collar workers who could afford to retire early. Lucas: Right — the opposite of the intended effect. So maybe the cleaner approach is to raise the standard age but beef up disability and early-retirement safety nets for specific groups. Luna: Which is basically what Denmark does. So what would happen if the U.S. adopted a Danish-style index? Lucas: The Social Security trustees project that under current law, the trust fund runs out of money in 2033. If the full retirement age were indexed to life expectancy starting in 2030, the trust fund would remain solvent indefinitely — and the retirement age would reach about 69 by 2050. Luna: So the math works. Yet no major presidential candidate has proposed it. Lucas: Because it's a third rail. But quietly, some blue-ribbon commissions have endorsed it. The 2016 Simpson-Bowles commission proposed indexing, and the 2020 American Academy of Actuaries report did too. Luna: So the expert consensus is there, but the political will isn't. Let's zoom out — does raising retirement age actually make people happier? Working longer isn't necessarily a bad thing if you like your job. Lucas: There's interesting data from Japan. After they raised the retirement age to 65 in 2013, surveys showed that people who worked past 65 reported higher life satisfaction than those who retired early — partly because of social connections and purpose. Luna: But that's self-selection. People who choose to work longer are healthier and more engaged. Lucas: Fair point. A 2022 study in the Journal of Health Economics used a regression discontinuity design around the Danish retirement age and found a small positive effect on cognitive function for those who worked one year longer. But no effect on physical health. Luna: So the case for raising retirement age is strong on GDP and fiscal grounds, but it's not a panacea. It has to be paired with policies that protect vulnerable workers. Lucas: Exactly. And that's the policy package that countries like Denmark and Sweden are building — automatic indexation plus a safety net. The result is a pension system that's financially sustainable and doesn't leave people behind. Luna: So the question for other countries is: can they replicate the Danish model without the Danish social consensus? Lucas: That's the trillion-dollar question — literally. The U.S., Japan, Germany, Italy all face the same demographic math. The difference is whether they phase it in slowly and transparently, or wait until a crisis forces cuts. Luna: And the clock is ticking. Japan's already there, Italy's dependency ratio is over 35 percent. The longer you wait, the more abrupt the adjustment has to be. Lucas: Right. Denmark started indexing in 2015 for changes taking effect in 2025. That's a ten-year lead time. If you announce today that the retirement age will go up by one month per year starting in 2030, nobody's life plan gets disrupted. Luna: That feels politically sellable. But it hasn't happened yet in most places. Lucas: Maybe the next recession will change the calculus. When governments look for revenue without raising taxes, delaying retirement is one of the least painful options. Luna: Or the most painful, depending on who you ask. But the numbers are hard to ignore. Lucas: They are. And as life expectancy continues to rise — even slowly — the gap between what's sustainable and what's current policy widens. Denmark shows a way to close it. Luna: Alright — worth watching which country follows next. Thanks, Lucas. Lucas: Thanks, Luna.