Principal investigator: Eduarda Miller de Figueiredo
Original title: Social Security and Retirement: An International Comparison
Authors: Jonathan Gruber and David Wise
Location of the Intervention: France, Belgium, Netherlands, Italy, Germany, Spain, United Kingdom, Switzerland, United States and Japan
Sample Size: 11 countries
Sector: social Security
Primary Variable of Interest: Unused work capacity
Type of Intervention: Retirement
Methodology: Others
Summary
The decline in the participation of older people in the workforce is perhaps the most dramatic feature of workforce change over the decades. This variation has resulted in enormous pressure on the viability of social security systems in many countries. This article analyzes evidence from 11 studies in industrialized countries that have been affected by this situation. The findings suggest a strong relationship between social security incentives to leave the workforce and the exit of older workers.
- Policy Problem
The population is aging rapidly in all industrialized countries, placing enormous pressure on the viability of social security systems in these countries. This is also accompanied by a trend of workers leaving the workforce earlier and earlier. According to the authors, one explanation for this is that social security provisions act as a huge incentive to leave the workforce early, due to their structure which exacerbates the financial problems faced by the population.
Therefore, in the article discussed here, the authors seek to draw attention to the important role that social security plays in the work decisions of older people. To this end, a comparison of evidence described in 11 articles from industrialized countries was presented.
- Implementation and Evaluation Context
In Figure 1, the authors present the difference in the proportion of people aged 65+ compared to people aged 20 to 64 for the study period (2014) and in future years, for the countries analyzed.
Figure 1: Proportion of the population aged 65+ to the population aged 20-64.
Source: Gruber and Wise (2014).
In the early 60s, labor force participation rates were above 70% in virtually all countries. However, by the mid-90s, the rate had fallen to less than 20% in Belgium, Italy, France, and the Netherlands, as can be seen in Figure 2.
Figure 2: Decline in labor force participation, age 60-64 years[1]
Source: Gruber and Wise (2014)
Up to the age of 50, approximately 90% of men are in the workforce in all countries. However, after the age of 50, there is a very large variation between countries. For example, in Belgium, at age 65 less than 5% of men are working. In Japan, almost 75% of men remain in the workforce at age 60, and at age 65, 60% continue working.
- Policy/Program Details
There are two characteristics of social security plans that have an important effect on incentives for participation in the workforce:
- The age at which the first benefits are made available is called the early retirement age.
- Pattern for accruing benefits.
Assuming that a person acquired, at the age x, the right to future benefits after retirement. The present value of these benefits, less taxes, is the person's pension net worth at that age (SSWa).[2]Therefore, the main consideration when making retirement decisions is how this SSW wealth will evolve in the event of continued work. The difference between SSW and retirement age is significant. x and SSW if retirement is at age x + 1[3]This is referred to as current SSW (Socially Sustainable Work). The authors compared the accumulation of SSW with net wage earnings over the year. If the accumulation is positive, it adds to the total compensation for the additional year's work, but if negative, it reduces total compensation. A negative increase discourages continued employment, while a positive increase has the opposite effect.
- Assessment Method
There are many implications associated with older men leaving the workforce, such as the loss of their productive capacity.
The authors consider the proportion of men not working at a given age (1-LFP), where LFP is the labor force participation rate.[4]In Belgium the ratio is 0,95 and in Japan 0,40 at age 65.
The authors refer to this measure as "unused productive capacity" at that age. If the unused capacity is summed across all ages within a given interval, the area above the LFP curve within that interval is found. Dividing the total area above and below the curve for that age interval, and multiplying by 100, provides an approximate measure of unused capacity within an age range, as a percentage of total work capacity in that age range.
To illustrate the point discussed, the authors use data from France, where labor force exit rates correspond with social security provisions.
The so-called "tax force for retirement" was also studied for all countries. To do this, the authors added up the implicit tax rates on work from age 55 to age 69. In other words, a measure based on continuous work income when a person approaches eligibility for social security benefits.
- Main results
Figure 3 shows the measures of unused productive capacity for all countries studied for the 55-65 age group. Belgium showed 67% unused productive capacity, while Japan only had 22%.
Figure 3: Unutilized Productive Capacity (Proportion)
Source: Gruber and Wise (2014)
According to the authors, pension accumulation (SSW) is typically negative at older ages, meaning that continuing in the workforce implies a reduction in the discounted present value of pension benefits.
Collective evidence from all countries combined shows that the age for social security eligibility contributes significantly to early retirement from the workforce. Furthermore, unemployment and disability programs serve as early retirement programs in many countries.
Results from France show that social security benefits are first made available at age 60. And the age-specific labor force exit rate jumps to approximately 60% in that age group.
The high dropout rate at the early retirement age in France also illustrates the role of the implicit income tax rate imposed by the provisions of the social security plan. In early retirement, the implicit tax rate is almost 70% for people with average lifetime incomes.
When observing this relationship for all the countries studied, the authors found that the relationship between implicit social security tax on labor is strongly related to the labor force participation of older people.
The results for calculating the "taxpayer force for retirement" show a clear relationship: there is a strong correlation between the taxpayer force for retirement and unused labor capacity. However, the relationship is non-linear, where the regression of unused labor capacity against the logarithm of the taxpayer force indicates that 82% of the variation in unused capacity can be explained by the pension labor force for retirement. Therefore, the data suggest a strong relationship between pension incentives to leave work and the exit of older workers from the labor force.
- Lessons in Public Policy
The conclusion suggests that the provisions of the social security program did indeed contribute to the decline in the participation of older people in the workforce, reducing the potential productive capacity of the workforce.
[1] The numbers above the histogram bars show the corresponding year of the data used for each country.
[2] SSWa = Social Security Wealth at that Age.
[3] In mathematical terms: .
[4] LFP = Labor-Force Participation Rate.
