Later and flexible retirement

Late entry into the labour market by youngsters, and early exit by older workers, combined with higher life expectancy, confronts the welfare state with a looming financing deficit. To ensure pension sustainability and adequacy, there is need to realign pension policy to increased life expectancy. From a macroeconomic perspective, increased participation of older people in gainful employment is essential for future prosperity. Two trends justify a change in our thinking about delaying retirement: (a) the health status of each elderly cohort is better than that of the last. And (b) the skill gap between old age and education is rapidly narrowing, so that, in the future, old people will be much better placed than they are today to adapt through retraining and lifelong learning. The education gap between the old and the young is already beginning to close now that the baby-boomers enter retirement (Esping-Andersen, 2002,2009). Beyond the development of multi-pillar pension schemes, including pay-as-you-go and funded tiers, in the area of old-age pension policy the challenge is how to allocate the additional expenditures that inevitably accompany population ageing (Myles, 2002). Of crucial importance remains a general revenue-financed first-tier pension with a price index guarantee for the next generation of flexible labour market cohorts. Sustainable pensions will be difficult to achieve unless we raise employment rates of older workers and raise the retirement age to at least 67. Delaying retirement is both effective and equitable. It is effective because it impacts simultaneously on the nominator and the denominator by combining more revenue with lower spending. It is intergenerationally equitable because retirees and workers both sacrifice in equal proportions. People are getting healthier with each new age cohort. Flexible retirement and the introduction of incentives to postpone retirement could greatly alleviate the old age pensions burden. If older workers remain employed longer than they typically do today, then household income will increase substantially and the pensions system would be better preserved. Labour markets need to be designed for second-career jobs—making work also attractive for older workers. This can be done by changing the relative competitiveness of older workers in comparison to younger people by replacing steep seniority wages with pay-for-performance components and agreements on repayment clauses if the employer invests in further education, thus also making it easier to take up so-called 'second careers'. From the employee's perspective, the choice of longer employment crucially depends on the quality of the workplace and health supports that match their competences. If workplaces can be made more attractive for older staff, the trend towards an exodus into retirement will wane. Social investment policy in this respect goes beyond capacitating public services and leave provisions. Above all, this means enabling re-employment as well as slow and continuous phased withdrawal from employment. Such a phased withdrawal would mean that part-time work is combined with partial pension benefits. An increase of the average length of working life, a partial privatization of the provision for old age, and an extension of minimum security in the pension system are politically feasible. The renewal of the post-war intergenerational contract necessitated by demographic change must not trample on the achievement of eliminating poverty in old age.