LABOUR MARKET PARTICIPATION AND RETIREMENT OF OLDER WORKERS
A. INTRODUCTION
The work and retirement patterns of older individuals (defined in this chapter as persons aged 55 and over) have undergone major changes during the past two decades. The ratio of employment to population has fallen for older men in every OECD Member country, oRen quite substantially. The record for older women is more mixed; some countries have experienced a decrease in the relative employment of older women, while others have seen their employment‘population ratios remain constant or rise over time. However, it is the decrease in older male employment that has dominated all other movements and led to the marked decline in labour force participation among older workers – a major withdrawal of resources from the labour market. This chapter details some of these developments and assesses the role that public policy has played in the areas of early retirement, long-term unemployment, disability and partial retirement. A full analysis of the labour market for older workers would entail consideration of both labour demand and supply factors specific to this age group, as well as an evaluation of general trends in the labour market. Demand-side analysis would address the relative productivity of older workers, their associated market wage, hiring and training costs and potential sickness record – in short, a profile of their total cost to the firm.
The labour supply of older workers will be influenced by factors such as wealth and household income, the range and nature of benefits and pensions available, and people’s preferences for leisure over work. Here, the analysis concentrates on labour supply factors. To understand how policies might influence retirement and labour force participation decisions, it is necessary to review the choices facing an individual approaching retirement age. For example, if an early retirement pension is available on condition that one leaves the labour force, then the individual has two alternatives: continue to work, receiving the regular wage until the “standard” age of retirement and then a “normal” pension; or accept the early pension, taking extra years of leisure with an income stream determined by pension entitlements. Most older workers have a choice which is generally not available to prime-age workers: whether to remain in the labour market or to retire with income support.
This choice will be “neutral” – i.e. not influenced one way or the other with regard to the timing of retirement – if the early retirement pension is reduced in an “actuarially” fair manner, so that the present value of the income stream is the same, regardless of the age at which the pension is taken up. In such a case, the pension wealth of the individual would be determined by the features of the pension benefit system, but not by the age of retirement. In practice, most schemes designed for early retirement are not neutral, but offer positive incentives towards retirement. Even when pensions are actuarially neutral, some people still wish to retire “early”. However, income constraints may well limit the ability of these people to obtain early retirement. Others who enjoy their work may defer their retirement beyond the conventional age.
In many countries, people take early retirement either directly through public pension schemes or indirectly through other public mechanisms, such as relaxed eligibility requirements for invalidity pensions, income support for the older long-term unemployed without specifying an active search for work, and tax incentives for private pension provision. Some of these schemes were designed to have an impact on high unemployment rather than on retirement or labour market flexibility. A number of schemes were designed to reduce the burden of unemployment on younger workers. However, whether or not these policies, often stipulating specific labour market conditions, remain in place, the expectation of earlier retirement that they produced is a lasting legacy. Such policies can be difficult to reverse. The chapter is organised as follows. The main changes over time in labour force participation and employment of older workers are outlined in Section B, which also shows the range of exit routes from the labour force. Section C details the increased duration of unemployment among the older population, and assesses the range of schemes introduced in certain countries to cope with rising joblessness in the 1980s.
Policy emphasis has shifted from encouraging continued contact with the labour market to liberalizing unemployment benefit pro195 grammes so as to allow older workers to be phased into retirement. When in work, older individuals usually have a higher than-average level of earnings and job security, but when they lose their job they find it harder than the average worker to return to employment. If they do obtain work, this is usually at a reduced wage or with poorer conditions. Sometimes, older workers are singled out for job losses when firms wish to reduce their workforce. Other times, they are given an incentive to leave the labour force, often a mixture of severance pay and long-term income support available through public transfer payments. Hence, some of the older jobless leave the labour force immediately or shortly after losing their jobs. While their decision to retire is, to a degree, voluntary, in a number of instances they are given little choice. Section D discusses early retirement and the general decrease in the age of first receipt of a public pension. There has been a downward trend in the standard age of public pension programmes up to recent years, as well as an increase in the number of people on public early retirement schemes. The incentives associated with these schemes, e.g. early and long-service pensions, are often non-neutral, discouraging continued participation in the labour force. In cases where such negative incentives are not present in the public scheme, they may well arise in conjunction with private policy arrangements such as employer pension plans or severance pay.
The interaction of private and public incentives can have a significant impact on retirement decisions. Public schemes designed to act as an income guarantee for older individuals may be used by firms to cushion the blow of joblessness, and thus make older workers more prone to job losses. Private retirement arrangements often follow the example of public transfer schemes. They can also hamper attempts to raise the standard age of retirement by substituting new schemes for the public benefits that are being amended or replaced. Invalidity benefits are an important route out of the labour force in certain countries. There is a complex interaction between illness, unemployment and receipt of these benefits; the precise role that each element plays is not easy to discern. However, the number of people who retire can depend on the particular nature of invalidity programmes. In some countries, awards of benefit have been subject to labour market conditions. Invalidity schemes in general are poorly integrated with employment and training programmes; they provide passive income support instead of encouraging reintegration into the world of work.
Section E details these arrangements. So far, retirement has been discussed in terms of a complete move out of the labour force. However, one issue is the extent to which flexible retirement options are available to workers, and the degree to which people can gradually reduce their working hours as they get older. Section F details differences in the availability and use of these options across countries; topics include part-time work, partial pension schemes, and the barriers associated with income tests for pensions. Often, individual flexibility is curtailed by private work and public benefit arrangements; workers are forced to terminate “career” jobs and move out of the labour force abruptly, with no option offered