The transition from work to retirement.

Author:Eichhorst, Werner
 
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1 Introduction

Raising the employment rate of older workers and postponing labor market exit has been a recurrent topic in both national and supranational discourse in the European Union. In particular, the EU has adopted a strategy of "active ageing", combining better labor market integration of older workers with increased participation in lifelong learning. This has become a core pillar of both the Lisbon Strategy and the European Employment Strategy in order to enhance social integration, economic growth and productivity as well as to counter the consequences of demographic ageing. Most explicitly, the EU has set ambitious quantitative targets to be achieved by 2010 as well as an elaborate monitoring process of EU member states' action.

This article assesses the current situation of older workers in EU labor markets and identifies different paths towards a better labor market integration of older workers by indicating the decisive role of labor market and welfare state institutions. Taking the changes in retirements policies in Germany as an example, main drivers of reforms are identified thereby assessing the relative role of supranational influences stemming from the European Employment Strategy and the Lisbon Strategy on the one hand and national politico-economic factors influencing core parameters for the employment of older workers on the other hand. The German policy sequence revoking an entrenched policy of early retirement is used as a case to exemplify the dynamics of institutional factors influencing the transition to retirement.

2 Towards a longer working life? Trends in EU member states

Regarding the employment of older workers in Europe - what has changed over the last decade? Figure 1 shows the evolution of the standard EU indicator of employment rates of older workers aged 55 to 64 between 2000 and 2009. Over time, most countries have achieved an increase in the employment of older workers by around 10 percentage points, so that at least the EU-15 countries could actually move close the 2010 Stockholm target of a 50 percent EU-wide employment rate of older workers. Yet the degree to which workers aged 55 and older are integrated into the labor market continues to vary across countries. Concerning the EU target, only four countries had already achieved a sufficient employment level of older workers as of 2009 (Sweden, Denmark, the UK and Portugal). Although 2009 was a year of crisis in most EU member states, nine further countries were able to meet this target - Estonia, Cyprus, Finland, the Netherlands, Latvia, Lithuania and Ireland, but also Germany - while Portugal experienced a slight drop. However, some Southern and Central European countries such as Malta, Poland, Hungary, Italy, and also Continental European countries such as Belgium and France still lag behind significantly in both terms of level and trend. In general, however, there is no clear divide in the employment rates of older workers between the EU-15 countries and the Central European EU member states.

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This general trend is confirmed by data on the actual retirement age in EU member states, which is to be raised by five years according to the Barcelona target, i.e. from an average of 60 to 65. Between the early years of the last decade and the latest available data, retirement ages have been increasing by about 1.5 years on average. Again, there are large differences amongst EU member states, which are basically related to institutional features of the welfare state. With regard to some Central and Eastern and Continental European countries, progress towards later retirement has been rather limited.

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Yet despite some convergence towards higher employment of older workers and later actual retirement, there are still significant and persistent differences in the employment situation of older workers in the EU. More active ageing is far from being a universal phenomenon in EU member states.

While one can observe successes and failures in postponing retirement and raising employment rates of older workers and still identify a common trend, diversity is even more pronounced and persistent in participation in lifelong learning than in employment rates or retirement ages - although lifelong learning is seen as a cornerstone of a European strategy enabling workers to cope with changing labor market conditions and technological progress. However, this may be explained by problems how lifelong learning activities are reported. The EU has set a target of 12.5 percent by 2020 for average participation in lifelong learning for adults aged 25 to 64. Figure 3 shows to what extent EU member states have met this target. Despite some increase in most EU member states, only a few of them have been able to achieve the target, in particular the Scandinavian countries, the UK, the Netherlands, Austria and Slovenia as well as Luxembourg. The EU-15 average grew from 8 to 11 percent, the EU -27 average from 7 to 9 percent. (1) Some countries such as Germany have achieved higher employment of older workers without much emphasis on adult learning.

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3 Explaining diversity

3.1 The role of incentives and behavior

What drives older workers' employment rates and their average retirement age? Strong and long-standing changes in employment patterns cannot be ascribed to business cycle variations. Institutional variables as well as behavioral factors matter and interact with each other, as incentives stemming from institutional arrangements influence actors' behavior and actors' demands for certain policies influence the design or change of existing institutions.

Earlier studies from the late 1990s had, in particular, addressed the issue of retirement incentives stemming from social benefits (Blondal/Scarpetta 1998; Gruber/Wise 1998). Recent comparative work by OECD researchers (Bassanini/Duval 2006) confirms this institutionalist view. It also shows that the removal of early retirement incentives, a later statutory retirement age as well as less generous unemployment benefits and lower income taxes and non-wage labor costs, i.e. tax wedges, all lead to higher employment rates of older workers. Dismissal protection can also stabilize employment of incumbent older workers if not offset by early retirement incentives. Hence, differences in employment rates across countries and over time can to a large extent be explained by institutional variation.

Institutional settings that can provide pathways out of the labor market do not only concern specific early retirement schemes but also options to receive old-age pensions at an early stage such as disability pensions, extended unemployment benefits for older workers, long-term sickness benefits and a number of other pathways to retirement such as old-age part -time work. Furthermore, there is strong interaction between early retirement policies and a discouragement of older workers' participation in job-related training (OECD 2006). The earlier workers leave the labor market, the less likely they are to participate in continuous vocational education (Bassanini et al. 2007). Active labor market policies can constitute an additional bridge to early exit from the labor market if such schemes are used to lower registered unemployment without a realistic chance of reintegration into regular employment. Limiting access to benefits and implementing stronger activation policies can, in turn, be expected to increase retirement age and employment levels of older workers as well as employees' participation in job-related training. Hence, incentives from social and labor market policies can either facilitate or postpone early withdrawal from the labor market.

Retirement incentives, however, affect the core labor force with a substantial employment and social insurance record in particular, so that substantial benefits can be received during retirement. Hence, the removal of such incentives can lead to higher labor force participation of older workers, in particular male labor market 'insiders'. Finally, behavioral factors can also matter independently from retirement schemes. This is particularly true for the stronger labor market attachment of younger cohorts of women. As more labor market- affiliated cohorts of women age, the employment/population ratio of older workers rises.

3.2 The politics of early retirement

Early retirement was implemented in many European countries, mostly Continental or Bismarckian countries, in the 1970s and the 1980s as a policy to contain unemployment in a situation of weak economic growth and massive deindustrialization. At that time, it was perceived as a socially acceptable policy facilitating smooth economic restructuring (Hemerijck/Eichhorst 2010; Palier 2010) in conjunction with a rejuvenation of the labor force and continually low open unemployment. This came, however, at the price of rising non-wage labor costs in those social insurance systems which heavily relied on this policy instrument.

Establishing early retirement policies is one thing - removing them is a different issue. Creating routes for early exit not only lowers firms' and workers' propensity to maintain employability via training, it also changes the public discourse and firm staffing routines. First, from the perspective of policy makers and the wider public, early retirement policies tend to suggest that a fixed "lump of labor" is to be preserved and redistributed to young labor market entrants by removing older workers from labor force (Kemmerling 2007). Second, from the perspective of firms, early retirement is a convenient solution to rejuvenate the labor force and raise productivity while at the same time avoiding costs for continuous vocational training. However, restricting training to younger people in a situation where older workers are expected to leave employment early tends to reinforce stereotypes about a general decline of productivity and...

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