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Arguments for increasing retirement age

Published on April 25, 2012 by: in: Economy

Debate on a longer retirement age is difficult owing to the fact that the most important arguments are non-intuitive. In communism era things seemed to be clear. Since the state guaranteed a fixed pension, early exit from the labour market was the most rational choice for an average citizen. Because seniority had indeed a minor impact on pension, it induced an early retirement. Even though given example can be perceived as extreme, pension systems that prevailed in the majority of developed countries were based on promises of a fixed pension not dependent on amount of paid contributions. Poor relation between pension and seniority created an additional incentive for an early retirement. The system lasted long enough to develop particular social behaviours and attitudes such as childcare done by early retired grandmothers, which apparently stemmed from shortfall of kindergartens and the lack of flexible forms of employment for women. Not to mention a deep belief that a lower retirement age threshold reduces unemployment among young people.

photo: WageIndicator - Paulien Osse

Most importantly, in the new pension system an early retirement signifies low pension! In the system where pension depends on amount of paid contributions and duration of professional activity, lower retirement age means lower funds divided by higher number of years. It applies in particular to women who now can retire 5 years earlier than men. Therefore, a higher retirement age should be in their interest, otherwise they will be doomed to poverty as pensioners.

A longer explanation is needed when dealing with the issue in context of the labour market. The opinion that oldies who departure from the labour market provide vacancies for youngster who join the workforce is still very strong. The socialist candidate in French presidential election, Hollande, voices exactly such opinion, calling for lowering retirement age threshold. The same logic pushed France to shorten a working week to 35 hours, which ultimately led to a significant loss in competitiveness of the French economy and growing unemployment. Working less for the same pay creates higher production cost relatively to other economies where working week is longer. Years later the French backed out – instead of helping people, 35-hour-working-week augmented unemployment. Such subtle implications are difficult to capture, as those who benefit from the shorter working week usually do not notice those who lose their jobs or cannot find it.

The same arguments apply to pensions. At the beginning of Polish transformation, retirement was considered to be a measure to reduce unemployment. When it turned out that within one year (1991) half million of people retired comparing to usual one hundred thousand retirements per year, additional source of income had to be found to cover dramatically growing public expenditures. Therefore, in first years of transition the government was forced to raise the social security contribution rate from 38% to 45%. Those who had already left the labour market were not affected by the raise, unlike employers who at that time allot money to the contribution. As a consequence of the raise, after some time companies had to limit future pay rises or make savings in other areas, including redundancies. For redundant employees the implication was hardly possible to capture.  High unemployment rate in the 1990s had its roots in good intentions of politicians involved in the social policy at the beginning of that decade. Mistakes can be excused when you are a pioneer of reforms. However, today it would be unwise not to draw conclusions from the past experience.

Employees in their 50s pushed out of the workforce make another issue to be taken into account in the debate. Some politicians use the following argument to support a low retirement age – let’s say if somebody aged 50 cannot find work, how could we force him to be unemployed until the age of 67. But the truth is somewhat more complicated. Namely, problems of employees in their 50s result from pre-retirement protection period, which discourage companies to hire persons who cannot be fired if necessary. Companies do not make redundancies willingly, but flexibility is indispensable when dealing with changes of market conditions, e.g. crisis of 2009. Not to be restricted by law, employer prefers to hire somebody in his 40s than a man ten years older. After increasing a retirement age threshold, problems on the labour market are set back. The best solution would be to abolish the protection period, yet it requires additional information action.

It is worth bearing in mind that vacancies left by sixty-year-old employees are not yearned for by the young people. The situation was different when physical job prevailed against high qualified work. Today employee in his 60s is replaced by the one a decade younger. Work for the people entering the workforce requires totally different skills. Good education, IT skills, foreign languages and ability to achieve goals are preferred to long professional experience, when talking about job offers nowadays. Therefore, substitutability between twenty-year-old worker and his gray-haired colleague proves to be a myth.

Longer professional activity produces not only additional income generated from contributions but also greater demand on the market, which creates new jobs and higher GDP. That’s why the pension system reform is so important for the economy.

As I mentioned before, the majority of arguments is non-intuitive, thus it requires a calm discussion and calculations instead of referendums and political fights. As society we live longer, so naturally we have to work longer for our pensions to be sufficient. Increasing  a retirement age threshold seems to be a matter of time. And it is better to realise that the time has come, otherwise we will be forced by the crisis to do a shock therapy.

Translation: Lucyna Stępień

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About Ryszard Petru

Economist, until recently director concerning strategy in BRE Bank. He was also an advisory to Leszek Balcerowicz and a specialist of the World Bank.

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