Public pension system as a determinant of a labour utilisation of older workers

In the past, early retirement policies were common in many countries, as governments used these measures to decrease unemployment through a reduction of labour supply (Boeri & Van Ours, 2013). From a political economic perspective, employers and trade unions often cooperated with each other regarding the usage of early retirement schemes in order to externalise costs of labour market restructuration on the public purse (Ebbinghaus, 2006). During the last 10-15 years we have witnessed a change in this respect with the increases of the statutory retirement age and limiting early retirement routes. Currently, as pension reforms are regarded as a key measure for promoting longer careers among older people (OECD, 2019a), experts tend to argue that an increase in the retirement age is an inevitable adjustment of pension systems (Gora, 2019).

Among the various drivers of individuals’ retirement decisions, the role of financial incentives stemming from instimtional pension design that make retirement more or less attractive clearly stands out (De Preter, Van Looy, & Mortelmans, 2013). Some researchers even argue that a situation of older workers contradicts standard labour market theory, because an impact of labour market institutions, such as pensions, on their decision is so strong that older workers are not actually free to choose the number of their working hours (Borsch-Supan, Buclier-Koenen. Kutlu-Koc, & Goll, 2018). Consequently, one could expect that an increase of a basic parameter of any pension system, that is a statutory retirement age, brings about an immediate change of labour market utilisation of older workers. Indeed, the cross-country study shows that an increase in a minimal age for claiming pension benefit by one year is associated with an increase in the participation rate of older workers by approximately 0.8 percentage points (Geppert, Guillemette, Morgavi, & Turner, 2019).

Nevertheless, some studies cast doubts on such simple causality, as they indicate a successful reform concerning increasing the retirement age in a given country is conditioned on an adequate labour demand for older workers (Etgeton, 2018). In other words, when a demand for labour of older people decreases, the value attached to a pathway that leads outside a labour market may increase. It should be also noted here that older workers in their transition to retirement may use institutional pathways outside the pension system such as unemployment benefits or disability benefits (Ardito, 2017). Indeed, a recent study (Geppert et al„ 2019) suggests that one underlying cause of increasing labour participation among older workers lies in reducing the possibilities of using these alternative retirement paths entailing unemployment and disability schemes.

Moreover, pension systems consist of different dimensions. Thus, when we look at the implications for labour utilisation, a retirement age should be analysed with reference to a high complexity of different elements of the pension system, such as an ‘earning test' for those who retire and want to continue work and benefit generosity and actuarial adjustments concerning the level of a fimire pension benefit stemming from delaying retirement (Blundell et al., 2016). In this vein, the recent comparative study aimed at understanding the impact of pension rules and laws on the behaviour of older people with regard to work and retirement (Borsch-Supan et al., 2019) proposed a useful framework for assessing whether a pension system is attractive for early or late retirement (Table 10.1). This framework helps us to identify how pension systems need to be constructed in order to keep the labour utilisation at the high level.

We add to the framework presented in Table 10.1 the issue of a benefit formula, because adjustments concerning the level of a future pension benefit stemming

Table 10.1 The scale of attractiveness of early retirement and late retirement

not attractive



very attractive

Attractiveness of early retirement:

Statutory eligibility age

> 65, changing quickly

> 65, changing slowly or not at all

< 65, changing quickly

< 65, changing slowly or not at all

Benefit deduction for earlier retirement

No early retirement possible

High deductions, making early retirement unattractive

Low deductions, making early retirement attractive

Flat benefits independent of retirement age






No part-time employment

Depends on pension fund/ kind of work

Depends on age

Possible for all employees

Special groups

No early retirement possible

No early retirement in public pension system

Early retirement for physically demanding jobs or long history (narrow eligibility)

Early retirement for long contribution history (broad eligibility) or flat benefits

Attractiveness of late retirement:



For all segments of the labour market

For some large segments of the labour market

For some small segments of the labour market

Mandatory retirement is illegal

Subsidies/costs for employers

No subsidies but high costs

No subsidies but low costs

Low subsidies

High subsidies

Earnings limits

Strict earnings test

No earnings test

Benefit increases for later retirement

No increase at all

Less than actuarial


More than actuarial

Source Adapted from Borsch-Supan et al. (2019, p. 8).

from delaying retirement depend on general rules of how pension benefits are calculated (D'Addio, Keese, & Whitehouse, 2010). In defined contribution and nonfinancial defined contribution systems, the rules seem to be quite straightforward, because when older workers continue employment, they become eligible to higher benefits, as there is an additional contribution to a pension fund. In defined benefit systems, pension benefits are typically determined with years of earnings. Hence, an additional year of employment might, apart from the obvious possibility to add additional years to an entitlement, enhance a composition of contribution record taken into account in a formula by including a year with high earnings at the expense of dropping out a year with lower earnings (OECD. 2011a, p. 53). The latter would be especially important for those workers who experienced a considerable growth in earnings in the last phases of their careers. In general, there was a tendency to believe that pension formulas based on the defined contribution principle provide older workers with greater incentives to prolong their careers than in the defined benefit systems (Lacomba & Lagos, 2009). However, a recent study (Qi, Helgertz, & Bengtsson, 2018), which evaluated the shift to the nonfinancial defined contribution system, found that this effect is a function of educational and occupational composition of the workforce of senior people: if a majority of older workers have low educational attainment and skills, the overall outcome concerning labour utilisation might be very small and even negative.

To sum up, while the role of pension systems regarding labour utilisation of older workers is fundamental, its importance has to be also assessed in combination with other factors, such as the general labour market situation of older workers in a given country.

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