Flexible Retirement

Prof. Axel Börsch-Supan, Ph.D. Munich Center for the Economics of Aging (MEA) 

CINTIA Opening Lecture, Torino, 24 November 2014

Flexible Retirement

Prof. Axel Börsch-Supan, Ph.D. Munich Center for the Economics of Aging (MEA) 

CINTIA Opening Lecture, Torino, 24 November 2014

B i r g / F l ö t h m a n n , I B S , U n i v . B i e l e f e l d 1 9 9 9

S c h a u b i l d 1 . 6E n t w i c k l u n g d e r A l t e r s s t r u k t u r d e r B e v ö l k e r u n g i n d e n a l t e n u n d n e u e n B u n d e s l ä n d e r n

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M ä n n e r ( n e u e L . ) M ä n n e r ( a l t e L . ) F r a u e n ( n e u e L . ) F r a u e n ( a l t e L . )

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M ä n n e r ( n e u e L . ) M ä n n e r ( a l t e L . ) F r a u e n ( n e u e L . ) F r a u e n ( a l t e L . )

20002025

2050 2100

1. Babyboom/Babybust

2. Longevity

3. Fertility

Pre‐fundingReal (!) funding of pensionsFiscal consolidation

Quality/QuantityEducation and health

Life‐courseadaptationEffective retirement age

Distribution: Minimum pension, „Pillar 0“ or similar

Expansion:1972: Introduction of flexible retirement at 63/60

Reforms:1992: Gross to net wage indexation, introduction of actuarial adjustments2001: Private pension pillar and minimum pension2004/07: Sustainability factor, retirement age ‐> 67

Reversal:2013/14: Retirement at 63, flexible retirement at 60

57

58

59

60

61

62

63

64

1960 1972 1984 1996

Year

All3 yrs

Expansion: Average entry/exit age

 ‐

 20

 40

 60

 80

 100

 120

 140

 160

 180

 200

1960

1963

1966

1969

1972

1975

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1999

2002

2005

2008

2011

Tausen

de

Volumen

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10

15

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1960

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1969

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Bezugszeit

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1972

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1981

1984

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1990

1993

1996

1999

2002

2005

2008

2011

Zahlbetrag

Zahlbertr…

Volume [1000 Euro]

Benefit duration[Years]

Benefit size [Euro/month]Amount per year

timesNumber of years

Gross to net wage indexation:

Labor market policies:1. increase of the retirement age by 2 years

2. decrease of the job entry age by 2 years

3. increase of female labor force participation(e.g.: convergence to 90 percent of the rate for men)

4. reduction of unemployment to the NAIRU rate

=> Would add some 15 percent to labor force

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69

Men

Denmark

2011

2007

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

15 18 2124 2730 3336 3942 4548 5154 576063 6669

Women

Denmark

2011

2007

© MEA @ MPISOC

Changes 2007 to 2011:

2007

20112007

2011

20072007

Labor market policies:1. increase of the retirement age by 2 years

2. decrease of the job entry age by 2 years

3. increase of female labor force participation(e.g.: convergence to 90 percent of the rate for men)

4. reduction of unemployment to the NAIRU rate

Has added some 17 percent to labor force!

Employment age 60‐65:

11.8

12.5

13.1

14.2

14.9

15.7

18.5

20.5

23.4

26.0

27.5

29.2

40.0

42.5

42.5

43.2

44.7

45.1

46.0

47.5

48.3

49.3

51.0

52.3

49.4

49.0

48.0

47.4

47.0

47.6

48.8

50.0

50.1

51.0

52.1

52.9

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Beschäftigungsquoten in Deutschland in Prozent

15 bis unter 65 Jahre 55 bis unter 60 Jahre 60 bis unter 65 Jahre

Headwind throughmore employmentin spite oftailwind throughdemography

Pension policies:• Earnings‐related pay‐as‐you‐go pension system• Actuarial adjustments at early retirement• Indexation to dependency ratio

• Sweden & Italy: NDC; Germany: Quasi‐NDC wrapped as DB (“sustainability factor”)

• Supplemental funded system(s)

=> Would change pillar weights (10 ‐> 40%)and labor supply incentives

Riester privateOccupationalOther private

© MEA @ MPISOC

Pension policies:• Earnings‐related pay‐as‐you‐go pension system• Actuarial adjustments at early retirement• Indexation to dependency ratio

• Sweden & Italy: NDC; Germany: Quasi‐NDC wrapped as DB (“sustainability factor”)

• Supplemental funded system(s)

=> Has changed pillar weights (10 ‐> 25%)(No direct data on labor supply incentives)

Reduction of implicit debt:

Employment• Minimum wage (€8.50/$12.00)

• General tendency to less flexibility in the labor market

„Pension package“• „Mütterrente“ & Retirement at 63 after 45 „service“ years

• Direct effect of „Rente mit 63“: ca. 150.000 jobs

• Indirect effects of entire “Rentenpaket“: ca. 50.000 jobs

70%

75%

80%

85%

90%

95%

100%

WZ35 WZ45

Männerkrank

self

mini

sonst

ausbild

schule

Zivi

pflege

kinder

alg_all

SVP

70%

75%

80%

85%

90%

95%

100%

WZ35 WZ45

Frauenkrank

self

mini

sonst

ausbild

schule

Zivi

pflege

kinder

alg_all

SVP

39.0 Jahre

34.4 Jahre 36.7 Jahre

32.6 Jahre

2.5 Jahre1.8 Jahre

1.9 Jahre1.3 Jahre

EP = 46.2EP = 44.4 EP = 35.9EP = 33.1

0

0.5

1

1.5

2

2.5

3

3.5

WZ35 WZ45 WZ35 WZ45

Männer Frauen

Month with illness(Age 50 – 59)  

• Widely attacked as textbook example for time inconsistency

• Law was anyway passed by large margin (grandcoalition)

• Applies to some 200.000 (priviledged) workers• Not harmful? LF=42m, but symbolic character• Limited to cohorts 52‐64• Public statement that retirement at age 67 will not be

touched, neither „sustainability factor“ (DB ‐> DC)• Glas a bit less full……. X

Labor income (100%)Pension income (100%)

Currently:

Aim:

Likelyoutcome:

Labor income(100%) Labor income

Partial pension

Pension(100%)

Labor income (100%)Labor

income

Partial pension

Pension(100%)

Participation rate [Persons] likely to increase Labor supply [hours] ex ante undetermined

Currently working full time: reduce labor supply

Currently no working at all: increase labor supply

7/18

Hou

rs s

uppl

ied

Hou

rs s

uppl

ied

LF participation rate LF participation rate

Labor supply

8/18

Austria

Part-time scheme reduces work volume

Ineffective measure to support employment of the elderly

Hours Worked

Retirement Age

Participants work marginally longer

-29%

Total hours decrease

Work volume after reform +1

%

10/18

(Winter‐Ebmer et al. 2012)

Finland

Part‐Time Pensions in Finland

2000 reform:

Increased flexibility but no reform of lack of actuarial adjustment:‐> Strong decline of labor force participation and work hours

2005 reform:

‐> No effect on part‐time pension on the expected prob. to continue working in the window 63‐68

Source: OECD 2001, Ilmakunnas (2006)

12/18

SwedenTotal Flexibility in Sweden

Empirical evidence

Pensions are drawn earlier   14/18

57

58

59

60

61

62

63

64

1960 1972 1984 1996

Year

All3 yrs

Flexibility without (correct) actuarial adjustments:

Theme 2: Old-age employmentPension policy changes and reactions (Börsch-Supan/Schnabel)

R2 = 0,8554

10

20

30

40

50

60

70

0,00 2,00 4,00 6,00 8,00 10,00Index of implicit tax rate on working longerSh

are

of 6

0-64

yea

r old

mal

es re

tired

Japan

USASweden

UKGermany

FranceBelgium

Italy

Netherlandsl d

Canada Spain

Gruber and Wise (1998)

29

PROBIT: RECEIPT OF A PENSIONMEN WOMENentry entry

ov ‐0.038*** ‐0.048***(0.002) (0.003)

retage_actadj 0.843*** 1.381***(0.035) (0.038)

retage_noactadj 0.956*** 1.067***(0.041) (0.035)

ssw ‐0.000*** 0.000(0.000) (0.000)

income54 0.000*** 0.000***(0.000) (0.000)

income542 ‐0.000*** ‐0.000***(0.000) (0.000)

sick_v 0.299*** 0.357***(0.008) (0.010)

edu_d2 ‐0.070 ‐0.092(0.066) (0.065)

edu_d3 ‐0.142 ‐0.243*(0.098) (0.140)

nrkids ‐0.011 ‐0.030*(0.059) (0.015)

30

Why? Myths!1. „Solidarity gap “: Who is threatened? Who will 

gain/loose?

2. Lump of labor fallacy („old crowd out young“)

3. More subtle: Health („too ill to work“)

4. Productivity („too outdated to work“)

5. Sideeffects of inactivity („use it or loose it“)

OECD Definition. Quelle: OECD (2012) Pensions at a Glance, OECD, Paris.

Share ofpersonsaged 65+ withincomebelow50% ofmedian

R2 = 0,1007

10

20

30

40

50

60

70

0 5 10 15

SpainNetherlands

Unemployment rate

Shar

e of

60-

64 y

ear o

ldm

ales

alre

ady

retir

ed

Japan

USA Sweden

FranceBelgium

Italy

CanadaGermany

UK

Share of early retireesamong males 60-64 (in %)

Unemployment rate (in %)

„Place madefree bythe old“

„Lack of place forfor the young“

„Lump of labor fallacy“

(data: OECD Employment Outlook)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

empl

oym

ent r

ate

year

empm20-24

empm25-54

empm55-59

empm60-64

35

Evidenz zum Gesundheitszustand älterer Menschen: Altersgradient

0

10

20

30

40

50

60

70

80

90

60 61 62 63 64 65 66 67 68 69

Selbsteinschätzunggut, sehr gut oderausgezeichnet [inProzent]

Keine Funktions-einschränkung [inProzent]

Greifkraft [in kg]in orangeSchwankungs-breite

Health at age 60‐69 in Europe

Self rated: percentexcellent, verygood and good

Functional: percent with noADL limitation

Objective:Grip strengthkg with stddeviation

© MEA @ MPISOC

Evidenz zum Gesundheitszustand älterer Menschen: Altersgradient

0

5

10

15

EU-2

7

Belg

ien

Tsch

echi

sche

Rep

ublik

Dän

emar

k

Deu

tsch

land

Irlan

d

Grie

chen

land

Span

ien

Fran

krei

ch

Italie

n

Ung

arn

Nie

dern

land

e

Öst

erre

ich

Pole

n

Portu

gal

Finn

land

Schw

eden

Gro

ßbrit

anni

en

2008 2009 2010 2011

Expected healthy life after age 65 (no limitations in daily activities), men

2008 2009 2010 2011

1.2 mio observationsover 4 yearsErrors as„dis-productivity“

InsuranceCompany

38

Myth 2: Older workers are less productive

(Rohwedder and Willis 2010 with SHARE data)

The demographic „problem“ is not an economic problem sincewe have the tools to handle it, and they have proven to besuccessful. It is rather:• a political problem of time inconsistency• and manymisperceptions

What can we economists do?• Show costs of time inconsistency: macroeconomic growth, 

microeconometric analyses of incentive effects• Dispel myths through carefully collected evidence