Facilitating longer working lives: the need, the rationale, the how David A. Wise

1. Facilitating longer working lives: the need, the rationale, the how David A. Wise Harvard University and the NBER

2. Theme • Social and economic choices in societies must adjust as the age structure of the population changes • In particular, some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers.

3. Three parts • The need and the gain • The rationale—better health • Emphasize reduction in mortality because it is an indicator of health comparable across countries • Also health and capacity to work (US) • How to facilitate longer working lives

4. The international social security project • Draw heavily on this ongoing project • Comparative results from 12 countries • Based on analysis by research teams in each country • Here, for illustration, will often compare the US, France, and the UK

5. Project Participants

6. The need • The changing demographic environment over the past four or five decades represents both an achievement and a problem. • Mortality rates have declined and life expectancy has increased substantially in industrialized countries. • This is the achievement.

7. The need cont. • What is the problem? • Declining birth rates and fewer young people, together with longer lives, have meant that the proportion of old to young is increasing. • As the number of older persons increases, health care costs will rise • because of the increase in the number of older people, • also because advancing technology will likely create better and perhaps more expensive health care treatments.

8. The need cont • And the cost of public pension (social security) programs will rise • But there will be fewer in the labor force to pay for these increasing social security and health care costs. • The problem has been magnified by the departure of workers from the labor force at younger ages along with substantial increases in the number of years they spend in retirement.

9. The need cont • Thus the theme above: some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers. • It will not be feasible to use all of the increase in longevity to increase years in retirement.

10. The need cont--the gain from prolonged LFP: • The increase in the LFP of older persons will increase production (GDP) • The increase in production will increase tax revenues • The increase in tax revenues will increase the funds available for social security and health care costs • And, the increase in LFP will likely increase personal saving (by default under the personal account systems)

11. The rationale • Better health and ability to work longer • Emphasize decline in mortality • An important indicator of health and • Available on comparable basis in all countries • Also decline in disability and potential for work (US)

12. The rationale cont • Decline in disability—US

13. Share of Men in Fair or Poor Health: mid - 1970s and mid - 1990s 0.40 0.35 0.30 0.25 0.20 Share 0.15 Mid - 1970s 0.10 11 Mid - 1990s Years 0.05 0.00 20 25 30 35 40 45 50 55 60 65 70 Age Source: Cutler and Liebman

14. The rationale cont • Decline in mortality—US, UK, France

15. How old do you need to be to "feel like" a 65 year old in the 1960s? -- Men in the UK 76 74 72 70 9.8 Age Years 68 66 64 62 1960 1970 1980 1990 2000 2010 Year

16. How old do you need to be to "feel like" a 65 year old in the 1960s? -- Men in the US 76 74 72 70 9.2 Age Years 68 66 64 62 1960 1970 1980 1990 2000 2010 Year

17. How old do you need to be to "feel like" a 65 year old in the 1960s? -- Men in France 76 74 72 70 9.6 Age Years 68 66 64 62 1960 1970 1980 1990 2000 2010 Year

18. The rationale cont • Employment and “health” (mortality)

19. Employment by age, US, UK, and France, 2007 100% 90% 80% 70% Employment rate 60% US 50% UK France 40% 30% 20% 10% 0% Age

20. Mortality by age, US, UK, and France, 2007 4% 4% 3% 3% Mortality rate US 2% UK France 2% 1% 1% 0% Age

21. Employment and mortality by age, men in the US 1977 and 2007 100% 7.0% Employment 1977 90% Employment 2007 6.0% Series3 80% Mortality 1977 5.0% Mortality 2007 70% Employment 60% 4.0% Mortality 50% 3.0% 40% 30% 2.0% 20% 1.0% 10% 0% 0.0% Age

22. Employment by mortality, men in the US, 1977 & 2007 100% 90% 80% 70% Employment 60% 2.7% 1977 50% 2007 1.5% 40% 30% 20% 10% 0% 0% 1% 2% 3% 4% 5% 6% 7% Mortality

23. Employment and mortality by age, men in France 1977 and 2007 100% 7.0% Employment 1977 90% Employment 2007 6.0% Series3 80% Mortality 1977 5.0% Employment % 70% Mortality 2007 60% 4.0% Mortality % 50% 3.0% 40% 30% 2.0% 20% 1.0% 10% 0% 0.0% Age

24. Employment by mortality, men in FR, 1977 & 2007 100% 90% 80% 70% Employment 60% 50% 1977 2007 40% 2.7% 30% 1.1 20% 10% 0% 0% 1% 2% 3% 4% 5% 6% 7% Mortality

25. Rationale cont—potential for work in the US • Cutler and Meara (2010) • Estimate labor force status for people aged 62-64 based on demographic and health characteristics • Then use estimates to simulate LF status for older groups

26. Labor force status in the US, with and without Socurity & Medicare Benefits, age 65 - 69, men 0.7 0.6 0.6 0.53 0.5 Labor Force Observed 0.38 Proportion 0.4 0.35 Labor Force Simulated Series2 0.3 Disabbled Observed Disabbled Simulated 0.2 0.11 0.08 0.1 0.05 0.01 0 HS/Less Any College

27. The How (to facilitate longer working lives) • Eliminate Social Security provisions that induce early retirement and penalize work at older ages—implicit tax on work. (Must include disability insurance and special unemployment programs.) • Abandon false excuses—the “boxed economy” proposition • Provide more flexible work arrangements 27

28. The how 1 • Implicit tax on work • Compensation from working: • Wage earnings • Increase in future retirement benefits • [Decline in PV of benefits if work another year] / [Net earnings if work another year] =[Implicit tax on work]

32. Have been increases in LFP since mid 1990s

33. Employment of men 60 - 64, US, UK, FR, 1968 - 2005 0.9 0.8 0.7 0.6 Proportion 0.5 US UK 0.4 FR 0.3 0.2 0.1 0 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Year

34. The how 2 • Abandon the false “boxed economy” view of the labor market • From the UK e.g.:“We will extend the voluntary Job Release Scheme to men over 60 so that those who want to retire early vacate jobs for those who are currently unemployed. This could take as many as 160,000 people out of unemployment and into work.” (The United Kingdom: the 1987 Labour Party manifesto says: SOURCE …)

35. THE BOXED ECONOMY Unemployed Younger Workers Retired Older Workers

36. The how 2—no evidence for boxed economy • Tax force to retire and youth employment • Within-country “natural experiments” • Cross-country comparisons • Panel regression results

37. Tax force to retire, men 55 - 65 out of the labor force, youth 20 - 24 unemployed ( 1995 ) 0 . 7 Belgium R 2 = 0 . 81 France 0 . 6 Netherlands Italy UK 0 . 5 Spain Germany Canada Proportion 0 . 4 US Sweden 0 . 3 R 2 = 0 . 23 Japan 0 . 2 0 . 1 0 0 1 2 3 4 5 6 7 8 9 10 Tax force to retire 55 - 65 not LF 20 - 24 U 1995 Log. ( 55 - 65 not LF) Linear ( 20 - 24 U 1995 )

38. Tax force to retire, men 55 - 65 out of the labor force, Youth 20 - 24 employed ( 1995 ) 0 . 7 1 . 8 Belgium R ² = 0 . 811 France 0 . 6 Italy Netherlands 1 . 5 UK 0 . 5 Spain Germany Canada Proportion 1 . 2 0 . 4 US Sweden 0 . 3 0 . 9 Japan R ² = 0 . 102 0 . 2 0 . 6 0 . 1 0 0 . 3 0 1 2 3 4 5 6 7 8 9 10 Tax force to retire 55 - 65 not LF 20 - 24 EMP 1995 Log. ( 55 - 65 not LF) Linear ( 20 - 24 EMP 1995 )

39. Response to reforms in France, 1971 - 1983 and 1993, unadjusted data 0.7 0.6 0 . 5 0.4 0.3 E 55 - 64 Rate 0.2 E 20 - 24 0.1 UE 20 - 24 0 - 0.1 - 0.2 - 0.3 1971 1993 2005 Diff 71 - 93 Diff 93 - 05 Year and difference

41. Comparison of the 6 countries with the least to the 6 with the greatest increase in the 55 - 64 employment, from beginning of last upturn in 55 - 64 employment, adjusted data -- difference 0 . 14 0 . 12 D 0 . 1 i 0 . 08 f 0 . 06 f 0 . 04 e E 55 - 64 r 0 . 02 E 20 - 24 e 0 UE 20 - 24 n - 0 . 02 c - 0 . 04 - 0 . 06 The 6 countries with The 6 countries with Difference greatest least increase in 55 - 64 greatest increase in 55 - minus least employment 64 employment

42. Panel estimates of the effect of the LFP of persons 55 to 64 on the unemployment and employment rate of younger persons, with controls Youth 20-24 Prime Age 25-54 Specification UE EMP UE EMP 5-year log -0.905 0.486 -0.960 0.144 difference (0.329) (0.090) (0.260) (0.028) A one percentage point increase in the employment of older persons reduces the the unemployment rate of youth by -0.905 percentage points and increases the employment rate of youth by 0.486 percentage points.

43. No evidence for the boxed economy proposition • The overwhelming weight of the evidence, as well as the evidence from each of the several different methods of estimation, is contrary to the boxed economy proposition. 43

44. Conclude • Some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers. • Improving health makes this a reasonable response to demographic trends • To facilitate longer working lives must: • Eliminate public and private pension plan provisions that penalize work at older ages • Must abandon the boxed economy view of the labor market