The retirement age and the pension system, the labor market and the economy
European countries face a challenge related to the economic and social consequences of their societies’ aging. Specifically, pension systems must adjust to the coming changes, maintaining both financial stability, connected with equalizing inflows from premiums and spending on pensions, and simultaneously the sufficiency of benefits, protecting retirees against poverty and smoothing consumption over their lives, i.e. ensuring the ability to pay for consumption needs at each stage of life, regardless of income from labor.
One of the key instruments applied toward these goals is the retirement age. Formally it is a legally established boundary: once people have crossed it – on average – they significantly lose their ability to perform work (the so-called old-age risk). But since the 1970s, in many developed countries the retirement age has become an instrument of social and labor-market policy. Specifically, in the 1970s and ‘80s, an early retirement age was perceived as a solution allowing a reduction in the supply of labor, particularly among people with relatively low competencies who were approaching retirement age, which is called the lump of labor fallacy. It was often believed that people taking early retirement freed up jobs for the young. But a range of economic evidence shows that the number of jobs is not fixed, and those who retire don’t in fact free up jobs. On the contrary, because of higher spending by pension systems, labor costs rise, which limits the supply of jobs. In general, a good situation on the labor market supports employment of both the youngest and the oldest labor force participants. Additionally, a lower retirement age for women was maintained, which resulted to a high degree from cultural conditions and norms that are typical for traditional societies.
The policy of a low retirement age in developed countries was driven by the demographic and economic situation. From the 1970s until the beginning of the 21st century, Europe benefitted from the so-called first demographic dividend: a situation where the working-age population was growing faster than that of non-working-age people. The demographic dividend supported economic growth, and simultaneously the stability of pension systems, as the ratio of those in the labor force to those drawing benefits was high.
As an effect of the aging of the population, the period of the first demographic dividend ended at the turn of the millennium. This was one of the reasons for a change in the direction of retirement-age policy. Beginning from the start of the 21st century, in OECD countries we can see a gradual increase in the retirement age for women and men, as well as a gradual reduction in the gap between the ages for women and men. Raising the retirement age significantly affects the relationship between those in the labor force and those drawing benefits, and as a result increases the financial stability of the pension system. Furthermore, from the microeconomic perspective, a higher retirement age and longer participation in the workforce also translate into higher pensions, and thus contribute to an improvement in pension systems’ sufficiency.
The process of increasing the retirement age is not yet complete: most developed countries plan to continue gradually increasing the retirement age. According to data from the Ageing Report 2018 (European Commission 2018), by 2050, 23 countries will increase the retirement age for women and make it equal to that of men, and nine of these countries will also increase the age for men. As a result, in half of EU countries, the statutory retirement age will be higher than 65. In nine of them (Italy, Finland, Portugal, Greece, Denmark, the Netherlands, Cyprus, Slovakia, Malta), the age changes along with life expectancy, which means that in the next few years the statutory retirement age in certain countries will exceed 70 years.
Simultaneously, an equalization of the retirement ages for men and women is under way. Countries where the age for women was lower than for men are gradually increasing it (Austria, Bulgaria, the Czech Republic, Latvia, Slovakia). Only Poland and Romania retain different retirement ages for men and women. In 2050, if the current regulations remain in place, women in Poland will retire the earliest of any country in the EU.
Authors: Dr. hab. Agnieszka Chłoń-Domińczak, Prof. Filip Chybalski, Dr. Michał Rutkowski