of working life and period of retirement into account when making decisions on consumption and labour supply. in the face of an expected extension of the period of retirement, consumers of working age will make appropriate provision by increasing their savings. conversely, expectations of a longer working life will boost the consumption of the working - age population in step with higher expected permanent income. path 3. on the other hand, the analysis indicates that if, instead of increasing pension contributions, pension replacement rates were reduced, households would respond by increasing their labour supply, and the loss in economic activity would remain far smaller. the required reduction in pensions would, however, be drastic, and so would its social and political costs. if it were to materialise, the large global increase in public pension contributions would not only mean an intergenerational income transfer, but could also entail losses in employment. at the same time, the growing fiscal cost of elderly care would increase pressure to raise taxes. it is doubtful whether pension contributions could really rise this much, particularly at a time when the increasing mobility of both labour and capital is reducing national governments'room for manoeuvre in taxation. the effort to achieve a more sustainable base for our pension systems has in recent years been a key plank of economic policy throughout the developed world. the sustainability of pension systems can, of course, also be improved by postponing retirement. this, would increase the number of people paying in and reduce the number of people receiving benefits. postponing retirement would slow the growth in pension expenditure, increase the supply of labour, improve the return on investments and accelerate economic growth. for the financial markets, the most important feature the various pension reforms all have in common has been the attempt to reduce the role of pay - as - you - go schemes in providing an income for the elderly. this does not necessarily mean the increased use of funded schemes within public pension systems. macroeconomically, the same result could be achieved simply by reducing or restricting access to the benefits of pay - as - you - go schemes. these types of reform would mean a reduction in the transfer of income from future age cohorts to present cohorts. as a result, the present generation's expected income flow would be reduced, people would become keener to take out private pension insurance to bridge the gap, and the saving ratio of the economy as a whole would rise. we all know how difficult such reforms would be politically. it is interesting to note that the

factor that will serve to prevent sudden price movements is the fact that the retirement of the baby - boomers can be anticipated. events that can be anticipated are not going to cause a collapse on the rationally based financial markets. thus, if the retirement of the baby - boom generation is seen to change the balance of supply and demand for financial instruments, the markets will already take this into account in their pricing years before the baby - boomers actually retire. the resistance of the financial markets will also be improved by a third factor. at least in those countries where pension cover is based to a considerable degree on private savings, there will be a mutual self - correcting interaction between the retirement of the baby - boomers and asset prices. if the approaching retirement of the baby - boom generation began to build up sales pressures on the asset markets and push down the prices of stocks, bonds and houses, this would reduce the value of the baby - boomers'own assets. many pension savers would then face a situation in which their pension assets would no longer allow them to maintain the standard of living they had hoped for in their retirement. some of those who had already planned to retire would then find themselves forced to stay on at work longer than they had intended. this would increase the level of pension savings and reduce the number of pensioners, improving the balance on the financial markets and preventing a price collapse. a study at the bank of finland by tuomas saarenheimo 1 on the financial market impact of ageing introduces another point of view that has received less attention in international discussion : the change in people's lifespan. this means higher life expectancy and, especially, longer retirement. from 1950 until the present day, the additional life expectancy of a person aged 60 has grown by around 5 years. it now stands at 22 years. by the year 2050 it is forecast to grow again by approximately another 5 years. the trend is more or less the same everywhere apart from those african countries that are suffering most from the aids epidemic. for the sustainability of public pension schemes it would be good if part of this longer lifespan could be devoted to remaining longer at work before retiring. so far, there exists only weak evidence of such a trend. the most likely outcome is that, in the future, most of these extra years will be spent in retirement. in the next few decades we can expect the time spent in retirement to increase by about a quarter. it is clear that an