Recasting Pensions in Europe: Policy Challenges and Political Strategies to Pass Reforms

Early retirement of employees in demanding jobs: Evidence from a German pension reform

Early retirement options are usually targeted at employees at risk of not reaching their regular retirement age in employment. An important at-risk group comprises employees who have worked in demanding jobs for many years. This group may be particularly negatively affected by the abolition of early retirement options. To measure differences in labor market reactions of employees in low- and high-demand jobs, we exploit the quasi-natural experiment of a cohort-specific pension reform that increased the early retirement age for women from 60 to 63 years. Based on a large administrative dataset, we use a regression-discontinuity approach to estimate the labor market reactions. Surprisingly, we find the same relative employment increase of about 25% for treated women who were exposed to low and to high job demand. For older women in demanding jobs, we do not find substitution effects into unemployment, partial retirement, disability pension, or inactivity. Eligibility for the pension for women required high labor market attachment; thus, we argue that this eligibility rule induced the positive selection of healthy workers into early retirement. We propose alternative policies that protect workers exposed to high job demand better against the negative consequences of being unable to reach their statutory retirement age in employment.

In recent decades, most countries have responded to continuous longevity improvements and population ageing with pension reforms. Increasing early and normal retirement ages in an automatic or scheduled way as life expectancy at old age progresses has been one of the most common policy responses of public and private pension schemes. This paper provides comparable cross-country forecasts of the retirement age for public pension schemes for selected countries that introduced automatic indexation of pension ages to life expectancy pursuing alternative retirement age policies and goals. We use a Bayesian Model Ensemble of heterogeneous parametric models, principal component methods, and smoothing approaches involving both the selection of the model confidence set and the determination of optimal weights based on model’s forecasting accuracy. Model-averaged Bayesian credible prediction intervals are derived accounting for both stochastic process, model, and parameter risks. Our results show that statutory retirement ages are forecasted to increase substantially in the next decades, particularly in countries that have opted to target a constant period in retirement. The use of cohort and not period life expectancy measures in pension age indexation formulas would raise retirement ages even further. These results have important micro and macroeconomic implications for the design of pension schemes and individual lifecycle planning.

Retention of senior employees is a challenge for most developed countries. We aimed to identify psychosocial work environment factors of importance for the retention of older employees by evaluating the association between the psychosocial work environment and voluntary early retirement in a longitudinal study. Data about work environment, health, and background factors came from the DANES 2008 questionnaire survey. We followed members of the Danish early retirement scheme for up to 4years in national registers-focusing on the age range, 60-64years, where early retirement was possible. We used Cox proportional hazard regression to analyze the rate of early retirement. The study included 16 psychosocial work environment factors. The following 10 psychosocial factors were significant predictors of early retirement in covariate adjusted analyses: Low job satisfaction, low influence in job, low possibilities for development, low role clarity, perceived age discrimination, low recognition from management, low workplace justice, poor trust in management, poor leadership quality, and poor predictability. No significant association with early retirement was found for work pace, quantitative demands, emotional demands, role conflicts, social community between colleagues, and trust between colleagues. Older employees with high job satisfaction, influence, possibilities for development, positive management relations, and jobs with no age discrimination remained longer at the labor market. However, we found no evidence that low demands or good relations between colleagues could influence older employees' decision on early retirement.

Adding more years to the work careers of an aging workforce – what works?

Most EU Member States have carried out substantial pension reforms over the last decades in order to enhance fiscal sustainability, while maintaining adequate pension income. The intensity of pension reforms has been particularly strong since 2000. These reforms have been implemented through a wide range of measures that have substantially modified the pension system rules and parameters. One of the most important elements of pension reforms, aside of whether countries engaged or not in a systemic change, has been the introduction of mechanisms aimed at automatically adjusting (indexing) the key pension parameters (pension age, benefits, financing resources) to demographic pressure (e.g. changes in life expectancy, increase in the dependency ratio). Indeed, since the mid-1990's, half of the EU Member States have adopted either automatic balancing mechanisms, sustainability factors and / or automatic links between retirement age and life expectancy. All these pension reforms are projected to have a substantial impact on containing future pension expenditure trends. According to the latest long-term projections in the 2015 Ageing Report, public pension expenditure is projected to be close to 11% of GDP over the long run in the EU, almost the same as in 2013. However, the fiscal impact of ageing is still projected to be substantial in many EU countries, becoming apparent already over the course of the next two decades. This is also due to the very gradual phasing in of already legislated reforms, an issue that raises questions about the intergenerational fairness of the reforms and poses some doubt on the time-consistency of their implementation. Indeed, the sustainability-enhancing pension reforms legislated in a majority of EU countries will lead to a reduction of generosity of public pension schemes for future generations of retirees. But to make sure that these reforms will not have to face political and social resistance and risk of reversal in the moment they start to be implemented in full, other flanking policy measures are likely to be necessary: for example, reforms that boost retirement incomes by effectively extending working lives and employability of older workers (also through flexible working arrangements that allow people to keep working beyond current formal retirement age and to step down gradually from full-time to part-time to very part-time work) and provide other means of retirement incomes (e.g. private pensions) and appropriate social-safety nets to avoid that low-wage people follow back in poverty at old age.

BackgroundStudies have shown a negative social gradient in the incidence of early retirement. To prevent undesired early retirement, there is a need for knowledge of specific predictors in addition to social factors with a limited potential for change. The main purpose of this study was to examine musculoskeletal complaints and working conditions as predictors of early retirement among Danish female cleaners.MethodsUsing Cox regression with an adjustment for extraneous factors, we compared the risk of disability pension and retirement before the nominal retirement age (65 years) in an 11-year cohort study with registry-based follow-up of 1430 female cleaners and 579 shop assistants. In subsequent analyses of female cleaners, disability pension and voluntary early retirement were modeled according to work characteristics and upper extremity complaints.ResultsThe adjusted hazard rate (HR) for disability pension among cleaners compared to the control group was 2.27 (95 % CI 1.58 to 3.28) and, for voluntary early retirement, 1.01 (95 % CI 0.85 to 1.20). In the subset of cleaners, the predictors of disability pension were persistent shoulder pain HR: 1.98 (95 % CI 1.47 to 2.67), elbow pain HR: 1.41 (95 % CI 1.02 to 1.94) and symptoms of nerve entrapment of the hand HR: 1.58 (95 % CI 1.14 to 2.20). Predictors of voluntary early retirement were persistent shoulder pain HR: 1.40 (95 % CI 1.16 to 1.67) and floor mopping for more than 10 h per week HR: 1.20 (95 % CI 1.03 to 1.40).ConclusionCleaners have a twofold higher risk of disability pension compared to the control group. Risk factors for disability pension among cleaners were persistent shoulder and elbow pain together with symptoms of nerve entrapment of the hand. The findings of specific health related predictors of early retirement could be used in secondary prevention with targeted temporary reduced workload.

Continuous longevity improvements and population ageing have led countries to modify national public pension schemes by increasing standard and early retirement ages in a discretionary, scheduled, or automatic way, and making it harder for people to retire prematurely. To this end, countries have adopted alternative retirement age strategies, but our analyses show that the measures taken are often poorly designed and consequently misaligned with the pension scheme's ultimate goals. This paper discusses how to implement automatic indexation of the retirement age to life expectancy developments while respecting the principles of intergenerational actuarial fairness and neutrality among generations of the respective policy scheme design. With stable demographic conditions, we show in policy designs in which extended working lives translate into additional pension entitlements, the pension age must be automatically updated to keep the period in retirement constant. Alternatively, policy designs that pursue a fixed replacement rate are consistent with retirement age policies targeting a constant balance between active years in the workforce and years in retirement. Under conditions of population ageing, the statutory pension age will have to increase at a faster rate to meet the intergenerational equity criteria. The empirical strategy employed a Bayesian Model Ensemble approach to stochastic mortality modelling to address model risk and generate forecasts of intergenerationally and actuarially fair pension ages for 23 countries from 2000 to 2050. The findings show that the pension age increases needed to accommodate the effect of longevity developments on pay-as-you-go equilibrium and to reinstate equity between generations are sizeable and well beyond those employed and/or legislated in most countries. A new wave of pension reforms may be at the doorsteps.

We provide empirical evidence that the removal of work disincentives embedded in retirement earnings tests can increase old-age labor supply considerably, but it does so at the cost of more income inequality. Causal effects are identified based on a reform of the Norwegian early retirement program, which entailed that adjacent birth cohorts were exposed to completely different work incentives from age 62. The reform removed a strict retirement earnings test such that pension wealth was redistributed from early to late retirees. Given the pre-existing employment and earnings patterns, this implied a considerable rise in old-age income inequality. In principle, this could have been offset by changes in the labor supply. We estimate that the reform triggered a 42% increase in hours worked during the ages covered by early retirement options. However, as the labor supply responses were of similar magnitudes across the earnings distribution, they did little to offset the rise in inequality. As measured by the Gini coefficient, inequality in overall old-age income rose by approximately 0.03 (17%).

Pension reform and the efficiency-equity trade-off: Impacts of removing an early retirement subsidy

The average age of retirement used to be low in most countries due to numerous policies introduced 30 to 40 years ago which encouraged lower retirement ages. However, in response to the growth of the older segment of the population, increased life expectancy, the need for skilled workers, and the precarious financial state of public pension systems, pension reforms have been implemented in the U.S. and Europe, and are now geared towards improving employment rates for older workers, increasing retirement ages and pension eligibility. This paper surveys recent changes in retirement age and maps the changes that have occurred in the last decades using data from 34 OECD (The Organization for Economic Cooperation and Development) countries. This paper then reviews the arguments for and against these changes, the criteria for setting a certain retirement age, and the differences in statutory retirement age by gender, occupation, employment status, and other factors unique to particular countries. The purpose of this paper is to analyze current trends in terms of raising the pensionable age.

Beware of the employer: Financial incentives for employees may fail to prolong old-age employment

Continuous longevity improvements and population ageing have led countries to modify national public pension schemes by increasing the standard and early retirement ages in a discretionary, scheduled, or automatic way, and by making it harder for people to retire prematurely. To this end, countries have adopted alternative retirement age strategies, but our analyses show that the measures taken are often poorly designed and consequently misaligned with the pension scheme’s ultimate goals. In addition, our analyses demonstrate that countries risk falling short of their goals given their use of projection methods that underestimate life expectancy. This paper discusses how to implement automatic indexation of the retirement age to life expectancy developments while respecting the principles of intergenerational actuarial fairness and neutrality among generations. We show that in policy designs in which extended working lives translate into additional pension entitlements, the pension age must be automatically updated to keep the period in retirement constant. Alternatively, policy designs that pursue a fixed replacement rate are consistent with retirement age policies targeting a constant balance between active years in the workforce and years in retirement. The empirical strategy employed to project the relevant cohort life expectancy uses a Bayesian Model Ensemble approach to stochastic mortality modelling to generate forecasts of intergenerationally and actuarially fair pension ages for 23 countries and regions from 2000 to 2050. The empirical results show that the pension age increases needed to accommodate the effect of longevity developments on pay-as-you-go equilibrium and to reinstate equity between generations are sizeable and well beyond those employed and/or legislated in most countries. A new wave of pension reforms may be at the doorsteps.

L’articolo analizza l’impatto della ultima riforma pensionistica operata dal governo Monti. Nel testo se ne stimano gli effetti sull’eta di pensionamento e sul livello dei trattamenti, nonche gli effetti in termini di produttivita e occupazione totale tenendo conto del prolungamento della vita lavorativa. Si analizzano inoltre alcuni meccanismi di incentivo e aspetti distributivi. Nel testo si utilizza un modello di microsimulazione dinamica, CAPP_DYN, descritto dettagliatamente nell’Appendice.

The research presented in this paper examines the influence of values and institutions on the early retirement decision of low and high skilled workers. It not only views the influence of economic incentives to retire early, it also examines the impact of individual values, social norms, and institutions. The study analyses transitions out of work into retirement and uses comparative panel data in 23 countries including the Baltic and many East-European countries from EU-SILC 2005-2008, matched with EVS data for 2008 to estimate multinomial logit models. The results suggest that social norms do influence the early retirement decision, yet not entirely in the way as expected, whereas the effects of individual-level values appear to be negligible. The early retirement age and the statutory retirement age both appeared to be important, but they affect the retirement decision differently. The generosity of old-age pensions, expressed in terms of replacement rates, has the expected pull effect on early retirement. Furthermore, attention was paid to the position of women and low skilled workers facing more uncertainties accompanied with early retirement. The results indicate that there are some gender differences concerning the effects of social norms, and that mainly the institutional factors are more important for women than for men. As to differences across skill levels some social norms appeared more influential for high skilled workers, whereas work ethos exerts a stronger effect on the low skilled workers’ retirement decision. Replacement rates were of greater impact on the low skilled worker decision, but the effects of individual values and the early and statutory retirement age appear not to differ by education or skill level. Lastly, no clear differences were found across the six distinguished welfare regimes including the Eastern regime type.