[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

Encouraging late retirement

Early retirement in Europe has often been cited as one of the main problems affecting public pension systems. As table 1 indicates, a high prevalence of early retirement across Europe is reflected in low labour force participation figures for men aged 5564. In Belgium, for instance, only 36.8% of men between 55 and 64 are working. In Austria, Finland, France, the Netherlands, and several other European countries, the corresponding figure is under 50%.

A significant problem
Early retirement is clearly an important problem in many European countries, where retirees are at the same time not contributing to the cost of funding pension obligations, and contributing to increasingly tight labour markets. Furthermore, however low the participation rates may be below official retirement ages, participation rates are even lower above those ages.

For example, table 1 shows that participation rates in Spain are only 2.5% and in Belgium only 3.4%. In order to cope with the challenges of ageing populations in the next 20 years, companies and governments need to do more to encourage late retirement.

The research
What sort of people work past the normal retirement age? Little research has been done on this topic, perhaps because the number of people at work past normal retirement ages is so low. Sociologists John Williamson and Tay McNamara of the Center for Retirement Research at Boston College have recently written a paper looking in detail at those who work past retirement age. They worked with data from the US 1998 Health and Retirement Survey, which is a regular survey of a select group of older individuals. Similar data will shortly be available in the UK through the English Longitudinal Survey of Ageing (ELSA).
Williamson and McNamara found that those who retire early tend to be those in poor health and with low incomes. Poor health reduces the probability of working at age 60 by 86%, but by age 80 the effect is much smaller, a reduction of only 36%. Poor health tends to be more important at younger ages, perhaps because those who work at older ages are more tolerant of certain disabilities.
Furthermore, those who have low non-work income (eg those without adequate savings) tend to work a bit longer. However, many of these individuals with low non-work income have major health problems and cannot work, especially at older ages. Low education tends to lead to early retirement. This relationship may be partly due to a greater likelihood of employment with higher physical demands.
The results in the paper suggest that policy reforms aimed at increasing labour market participation among older individuals may disproportionately benefit the well-off workers, who have a greater propensity to work past retirement. In order to induce poorer individuals to remain in work, special policies may be required.
The authors also conclude that more employer flexibility about part-time work is quite important, particularly in respect of workers of moderately poor health. Such flexibility would benefit most those poorer individuals least likely to continue working.

Distinct characteristics
The general conclusion is that the characteristics of those who work past retirement are distinct. The authors suggest that this implies that improving incentives to work past the official retirement age is unlikely by itself to raise the low participation rates evinced at higher ages. Changes in employment practices which encourage flexibility are more likely to have a substantial impact.
Such practices could be encouraged through the tax system. However, the design of phased retirement programmes is quite complex, as illustrated by the problems Norway has had with its phased early retirement programmes. It is clear, however, that encouraging work past the normal retirement age is a difficult area which requires further attention and more analysis. o

This article first appeared in epn magazine (European Pensions News)