A flexible retirement age is no cure-all

A ZHAW study shows that introducing a flexible retirement age will not necessarily result in people working longer. Incentives such as attractive working conditions are needed to keep older employees in the labour market longer.

Wednesday, 19 February 2020

In light of increasing financial pressure on retirement provision, introducing a flexible retirement age has become more important in the political debate about pensions. The flexible retirement age is an integral part of Switzerland’s old-age and survivors' Insurance reform (OASI 21), which is currently being discussed in the Swiss parliament’s Social Security and Health Committee. However, a recent ZHAW study shows that a flexible retirement age may not have the expected effect. “People won’t necessarily extend their working lives,” says ZHAW’s Isabel Baumann, who heads the study. Baumann and co-author Ignacio Madero-Cabib of the Catholic University of Chile analysed pension transition processes in four countries with flexible retirement policies on the basis of population surveys. The outcome of the study: transition processes with retirement before 65 (43 percent) and around 65 (23 percent) were the most frequent overall. The study found that almost two-thirds of the approximately 2,500 people surveyed retired between their early and mid-sixties.

Fewer benefits and a later retirement

Ergebnisse einer Studie zur Flexibilisierung des Rentenalters

The ZHAW study, funded by the Swiss National Science Foundation (SNSF), also revealed differences between Chile, the USA, Denmark and Sweden, depending on the type of retirement provision system they had. Compared to the Scandinavian countries with their generous and comprehensive benefits, people tend to retire later in the liberal-oriented USA and Chile, where pension benefits are relatively low. In other words, countries with low social security benefits appear to have stronger overall incentives to work longer.

However, people with health problems are an exception. They are more likely to retire early in the liberal countries than healthy older workers. The difference in retirement behaviour between people with and without health problems was observed only in the USA and Chile, but not in Denmark and Sweden.

Working longer due to attractive working conditions

Flexible retirement systems therefore have different effects, depending on the specific structure of the social welfare systems. But they do not necessarily result in longer working lives. “This should be kept in mind when discussing the introduction of a flexible retirement age as a part of the current reform proposal. Different approaches are needed to encourage people to stay in the labour market. More attractive working conditions for older employees would be one possibility,” says the ZHAW researcher. “The aim should be to maintain the reduction in old-age poverty achieved by the OASI and to avoid the financially precarious situation that pensioners face in countries like the USA,” explains Baumann. After all, even in the liberal welfare states, where older people tend to work longer due to pension benefits that can be precarious, early retirement was by far the most widespread transition pattern among the population groups (cohorts) studied. The cohort in this study is now about 75 years old. More detailed research will be needed to see how the retirement age develops among younger cohorts (such as those currently in the retirement phase).