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Christian Toft, Edward Whitehouse, and Gary Burtless Beijing Normal University, China,

Pension Reform, Retirement Ages, and Labour Supply in the United States and the European Union (EU15) 1950-2060. Christian Toft, Edward Whitehouse, and Gary Burtless Beijing Normal University, China, Wednesday 22 May 2013. Outline. 1: Introduction

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Christian Toft, Edward Whitehouse, and Gary Burtless Beijing Normal University, China,

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  1. Pension Reform, Retirement Ages, and Labour Supply in the United States and the European Union (EU15) 1950-2060 Christian Toft, Edward Whitehouse, and Gary Burtless Beijing Normal University, China, Wednesday 22 May 2013

  2. Outline 1: Introduction 2: Reform and trends in normal and early pension eligibility age provisions 3: Pre- and post-reform incentives to retire 4: Reform and trends in labour market participation 5: Reform and future labour supply 6: Conclusion and discussion

  3. Abstract / Summary • Taking a long 60 year look at trends in pensionable age policy this chapter places current policy initiatives in a broader context and considers how the different policies in the U.S. and EU15 countries have impacted on labour supply and participation of older people and how recent policies currently being phased-in are projected to impact during the next 50 years. • We argue that the substantial gap between the participation rates on the two continents developing until the mid 1990s can largely be explained by differences in retirement age policy and that the much stronger increase in participation in EU15 vis-à-vis the U.S. during the past 15 years is one of the fruits of the new policies that have been adopted. • Indeed, projections of the impact of retirement age reform discussed in the chapter indicates that in future we can expect EU15 countries to have higher participation rates for older people than the United States, thereby turning the pattern of the past forty years on its head.

  4. Socio-economic context of pension reform Socio-demographic trends People live longer and get fewer children Changing labour markets Men retire earlier and enter the labour market later Increase in women’s labour market participation converging towards the male pattern Changing family structures New family structures with more single person households Increase in women’s paid work implying less time for caring (elderly & children) New social demands due to increase in number of lone parents Child poverty

  5. Received comparisons: US – EU European welfare states: innovative & advanced US welfare state: laggard & under-developed

  6. Pension policy traditions ‘Bismarck’-style public pension plans: Earnings-related contributions and benefits emphasising fiscal equivalence between contributions and benefits. Limited private provision of retirement benefits ‘Beveridge’-style public pension plans: Provision of basic, flat-rated pension with little or no emphasis on fiscal equivalence between contributions and benefits. Significant provision of private retirement benefits

  7. U.S. – EU15 comparison of pension policy traditions

  8. Factors shaping retirement patterns Pull factors: These primarily consist of financial incentives which are “pulling” older workers into retirement. Push factors: These consist mainly of factors which restrict the available set of attractive job opportunities open to older workers and thus “push” them into retirement.

  9. Comparative literature mid 1990s Blöndal and Scarpetta OECD Project Gruber and Wise NBER Project

  10. Table: Population and ageing trends - mid 2000s to 2050

  11. Figure: Populations of working age (20-64) by age group in Germany in 2010 and 2030

  12. Figure: The last remaining German - On the road to the gray republic

  13. US – EU Reforms Last major US pension reform: Reagan 1983 Europe: Permanent state of reform 13

  14. Table: Overview of country cases

  15. Outline 1: Introduction 2: Reform and trends in normal and early pension eligibility age provisions 3: Pre- and post-reform incentives to retire 4: Reform and trends in labour market participation 5: Reform and future labour supply 6: Conclusion and discussion

  16. Summary: We extend and expand the recent work by Turner (2007) and Chomik and Whitehouse (2010) on pension eligibility ages 1950-2050 by emphasizing more clearly the difference between normal and early eligibility ages, and by including the most recent reforms as well as the early retirement options implicit in unemployment compensation and disability schemes.

  17. Summary of issues: • Normal pension eligibility ages • Early eligibility ages and actuarial benefit adjustments • Pre-retirement options (unemployment – disability)

  18. Normal pension eligibility ages My definition The normal pension eligibility age is that age at which pension scheme members, independent of contribution record can first draw full benefits without reduction for early retirement. Alternative definition (Whitehouse) The age at which a full career workercan first draw full benefits without reduction for early retirement. A full career worker is defined as an individual starting work at age 20 and contributing in every year from that time.

  19. The U.S. benchmark Normal age (since 1937): 65 years of age Early eligibility age (since 1956/61): 62 years of age Deductions for early retirement since 1956 No introduction of special rules for older workers in unemployment compensation Disability

  20. Normal pension eligibility ages reform1950-2000 versus 2000 onwards Few alterations in normal eligibility ages 1950-2000 but we see a wave of reform after the turn of the century U.S. Reagan reform 1983 – phased in from 2002 onwards All major EU15 countries are now following the American lead and example Germany in 2007 followed by France in 2010, and Italy and Spain 2011 New EU innovation – eligibility age dependent on life expectancy: Denmark, Italy, and Greece

  21. Figure: Reforming early and normal retirement age provisions, 2002 and 2011

  22. Early eligibility ages and actuarial benefit adjustmentsU.S. pioneer versus the European norm • United States has been a pioneer in introducing early retirement options, instituting an early eligibility age at 62 years of age for women in 1956 and for men in 1961 but with an annual actuarial decrement of 6.67 per cent • In Europe, only France and Sweden had a similar rule at the time. Spain also introduced an early age option with actuarial deductions in 1967  • With these exceptions and until recent reforms, the European norm has been to include early eligibility age provisions without actuarial decrements

  23. Early eligibility ages and actuarial benefit adjustmentsEarly reforms: 1950s onwards Special early eligibility age for women: • Austria, Belgium, Germany, Greece, Italy, and the UK Special early eligibility age for the long-term unemployed: • Germany, Austria, and France

  24. Early eligibility ages and actuarial benefit adjustmentsSecond generation reforms: 1970s onwards Only in the 1970s were universal early retirement provisions introduced on a wide scale in Europe • Germany, Belgium, France, and Finland • Netherlands, Denmark

  25. Example: Italy Seniority Pensions & Baby Pensioners 1956 seniority pensions (pensione di anzianità) were introduced for public sector employees, allowing them to retire with a full pension after twenty five years of service (twenty years for women) without any age restrictions From 1965 onwards private sector workers could retire at any age after 35 years of service and in 1973 contribution requirements for public sector workers were reduced to 20 years of service (fifteen for women). In Italian discourse these people were often referred to as “baby pensioners” because of their young ages An age restriction (and actuarial reductions) was only introduced in 1993 when a minimum age of 52 years was introduced. Increased during the 1990s

  26. Early eligibility ages and actuarial benefit adjustments Reforms since the mid 1990s  • First, spurred on by EU legislation relating to gender equality, special early eligibility ages for women are being phased out • Second, countries such as Germany, Finland, and Austria have abolished special provisions for the unemployed. On a broader front, concurrent with the increase in the normal eligibility age, during 2002-2012 the early eligibility ages have been set up in many countries (see figure) • Third, beginning with Finland in 1986, countries that did not already have it (e.g. France, Sweden, Spain) have implemented actuarial reductions for early retirement, and the required numbers of contribution years have also been increased in a several countries

  27. Figure: Reforming early and normal retirement age provisions, 2002 and 2011

  28. Pre-retirement options: U.S. versus EU In addition to pension policy, development of early retirement options during the 1970s onwards involved unemployment compensation and disability policy. (Italy exception) U.S. unemployment compensation has limited duration and in contrast to Europe, no special rules for older workers were introduced 1970-1990 By contrast, EU15 countries introduced i) special pre-retirement schemes for older workers (Belgium, France, Denmark, Finland) ii) relaxed job-search rules for older workers, and iii) extended insurance benefit duration

  29. Pre-retirement options: French caseThe Mitterrand reform In the case of France, Guillemard (1991) argues that the introduction of a full career option in 1982/83, allowing people with 37.5 years of contribution to retire at the age of 60, was in fact part of a cost-cutting exercise aiming to move claimants from generous unemployment compensation to the less generous pension scheme Technically speaking, the Mitterrand reform removed the early retirement penalty for long service employees in the age interval 60-65 (Bozio 2006)

  30. EU pre-retirement options – example FinlandThe “unemployment pipeline” Finnish developments conveniently illustrate in a simplified manner the essential features of a broader European trend. What has become known as the “unemployment pipeline to retirement” consists of one sequence of schemes that applies to all localities, all industries, and both sexes In institutional terms, Finland is the polar case to Italy. While in Italy almost all early withdrawal options have been a result of general rules embedded in the regular pension scheme, in Finland almost all withdrawal options have been based on special provisions in pension, unemployment compensation, and disability legislation

  31. EU pre-retirement options – example Finland Ordinary unemployment insurance Extended unemployment insurance (for people over a certain age) Unemployment pension, with benefits related to pension provision (in contrast to unemployment insurance – i.e. the Danish approach) Normal retirement age

  32. Figure: Pre-retirement policy in Finland 1971 onwards

  33. Pre-retirement options: Disability policyPolicy traditions Under most programs, provisions for disability benefits for persons who are permanently disabled as the result of non-occupational causes are very similar to those for the aged. The same basic formula usually applies for total disability as for old age—a cash amount usually expressed as a percent­age of average earnings. Partial disability benefits, if payable, are usually reduced, according to a fixed scale. The system may also provide rehabilitation and training. Source: US Social Security Administration: Social Security Programs Throughout the World Europe 2010 Page 7

  34. Disability: Policy issues • Medical criteria • Labour market criteria (unemployment insurance) • Permanent or temporary awards - rehabilitation

  35. Disability: Policy trends until the mid1990s Given the importance of disability benefits as an income support for persons leaving the labour market before the pensionable age, entitlement conditions for this type of benefits are particularly relevant for the retirement decision. In any case, there are strong indications that entitlement conditions have been de facto eased in disability benefit systems throughout OECD countries. The easing of eligibility requirements has been most notable in countries which have introduced an explicit labour-market criterion in granting disability pensions. Source: Blöndaland Scarpetta (1999 Page 23)

  36. Disability: Policy reform since mid1990sExample: The Netherlands Disability Insurance in the Netherlands has been rigorously reformed. Crucial elements of the reforms were stronger incentives for employers and employees to prevent sickness and disability, obligations regarding reintegration, and a strong financial incentive for benefit recipients to continue working when possible. The reform had its effect: chapter 3 of this study argues that disability insurance is no longer used as an early exit route into retirement. In the Netherlands, the inflow of hidden unemployment (retirement) in DI seems to have halted. …. One may however ask whether older workers are sufficiently insured by DI. The admittance to DI benefits for ‘fully disabled’ has become very strict. Source: Euwalset al 2009 Rethinking Retirement pages 25 & 75

  37. Outline 1: Introduction 2: Reform and trends in normal and early pension eligibility age provisions 3: Pre- and post-reform incentives to retire 4: Reform and trends in labour market participation 5: Reform and future labour supply 6: Conclusion and discussion

  38. Generosity indicators Replacement rates Pension wealth Changein pension wealth from working an additional year

  39. Effects of working a year longer In contributory pension schemes, a longer working period may imply an extra year’s contribution which usually brings some extra pension entitlement. A longer work period implies a shorter duration of retirement The final elements of the pension incentive to retire reflect further costs to the worker of delaying the pension claim. The worker might die during the year, and so receive nothing from the pension system. Different workers might also have different time preferences, with some having particularly strong preferences for current rather than future consumption.

  40. Table: Implicit tax and “subsidy” rates on continued work embedded in public pension schemes, 1967, 1995, and prospective rates

  41. Table: Implicit tax and “subsidy” rates on continued work embedded in benefits for the elderly, 1995

  42. Conclusion: Pension incentive analysis We see an overall return to incentive neutrality similar to the 1960s and a “rank-reversal” vis-à-vis our United States and EU15 comparison in that most EU15 coun-tries will have lower implicit tax rates and therefore better incentives than the United States once all reform induced changes have been phased in. On this measure, only Southern Europe (except Spain) has worse incentives than the US. However, incentive problems in unemployment and disability benefit systems may remain

  43. Outline 1: Introduction 2: Reform and trends in normal and early pension eligibility age provisions 3: Pre- and post-reform incentives to retire 4: Reform and trends in labour market participation 5: Reform and future labour supply 6: Conclusion and discussion

  44. Data In contrast to the United States, Europe does not have a long time series providing estimates of age and sex specific participation rates on a consistent basis. Our dataset draws on three sources. A: 1950, 1960, 1970. Data for these years are from ILO (2004) whereby the primary sources in most instances appear to have been population censuses. B: 1970-1983. The estimates for these years are based on a number of different sources. C: 1984-2010. Ourestimates for these years have as a starting point been taken from the ILO dataset “Labour Force Participation Rates 1980 to 2009” (obtained 10 June 2010). Most of the data are from the EU Labour Force Survey. For those years where there are no Eurostat data, ILO appears to have estimated rates based on conventional national surveys, but linking these rates with the Eurostat data.

  45. Figure: Trends in Labour Force Participation Rates, EU15 and US, 1950-2010, Men

  46. Figure: Trends in Labour Force Participation Rates, EU15 and US, 1950-2010, Women

  47. Changes in participation rates 1970 to 1982 Base year: First year with labour force survey data (mostly either 1970 or 1974) 1982: Between 1982 and 1984 many countries revised their data – introduction of EU survey

  48. Annex Table 1A: Changes in participation rates, men, 1970 to 1982

  49. Annex Table 1B: Changes in participation rates, women, 1970 to 1982

  50. Changes in participation rates 1984-2010 Identification of “year of minimum” for men Change from 1984 to “year of minimum” Change from “year of minimum” to 2010

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