Facilitating longer working lives: the need, the rationale, the how

David A. Wise

Harvard University and the NBER

Theme

• Social and economic choices in societies must adjust as the age structure of the population changes

• In particular, some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers.

Three parts

1. The need and the gain

2. The rationale—better health 1) Emphasize reduction in mortality

because it is an indicator of health comparable across countries

2) Also health and capacity to work (US)

3. How to facilitate longer working lives

The international social security project

• Draw heavily on this ongoing project

• Comparative results from 12 countries

• Based on analysis by research teams in each country

• Here, for illustration, will often compare the US, France, and the UK

5

Project Participants Belgium Alain Jousten, Mathieu Lefèbvre, Sergio Perelman,

Pierre Pestieau, Raphaël Desmet, Arnaud Dellis, and Jean-Philippe Stijns Canada Michael Baker, Kevin Milligan, and Jonathan Gruber Denmark Paul Bingley, Nabanita Datta Gupta, and Peder J.

Pedersen France Luc Behaghel, Melika Ben Salem, Didier Blanchet,

Thierry Debrand, Muriel Roger, Antoine Bozio, Ronan Mahieu, Louis-Paul Pelé, and Emmanuelle Walraet

Germany Axel Börsch-Supan, Hendrik Juerges, Simone Kohnz, Giovanni Mastrobuoni, and Reinhold Schnabel

Italy Agar Brugiavini and Franco Peracchi Japan Takashi Oshio, Satoshi Shimizutani, Akiko Sato Oishi, and Naohiro Yashiro Netherlands Adriaan Kalwij, Arie Kapteyn and Klaas de Vos Spain Pilar García-Gómez, Sergi Jiménez-Martín, Judit Vall

Castelló, Michele Boldrin, and Franco Peracchi Sweden Lisa Jönsson, Mårten Palme, and Ingemar Svensson United Kingdom James Banks, Richard Blundell, Antonio Bozio, Carl

Emmerson, Paul Johnson, Costas Meghir, and Sarah Smith United States Kevin Milligan, David Wise, Courtney Coile, Peter

Diamond, and Jonathan Gruber

The need

• The changing demographic environment over the past four or five decades represents both an achievement and a problem.

• Mortality rates have declined and life expectancy has increased substantially in industrialized countries.

• This is the achievement.

The need cont.

• What is the problem? • Declining birth rates and fewer young

people, together with longer lives, have meant that the proportion of old to young is increasing.

• As the number of older persons increases, health care costs will rise– because of the increase in the number of

older people, – also because advancing technology will

likely create better and perhaps more expensive health care treatments.

The need cont• And the cost of public pension (social

security) programs will rise

• But there will be fewer in the labor force to pay for these increasing social security and health care costs.

• The problem has been magnified by the departure of workers from the labor force at younger ages along with substantial increases in the number of years they spend in retirement.

The need cont

• Thus the theme above: some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers.

• It will not be feasible to use all of the increase in longevity to increase years in retirement.

The need cont--the gain from prolonged LFP:

• The increase in the LFP of older persons will increase production (GDP)

• The increase in production will increase tax revenues

• The increase in tax revenues will increase the funds available for social security and health care costs

• And, the increase in LFP will likely increase personal saving (by default under the personal account systems)

The rationale

• Better health and ability to work longer

• Emphasize decline in mortality– An important indicator of health and– Available on comparable basis in

all countries

• Also decline in disability and potential for work (US)

The rationale cont

• Decline in disability—US

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

20 25 30 35 40 45 50 55 60 65 70

Age

Share of Men in Fair or Poor Health: mid-1970s and mid-1990s

Mid-1970s

Mid-1990s

Source: Cutler and Liebman

11Years

The rationale cont

• Decline in mortality—US, UK, France

62

64

66

68

70

72

74

76

1960 1970 1980 1990 2000 2010

Year

How old do you need to be to "feel like" a 65 year old in the 1960s?--Men in the UK

9.8Years

--

62

64

66

68

70

72

74

76

1960 1970 1980 1990 2000 2010

Year

How old do you need to be to "feel like" a 65 year old in the 1960s? Men in the US

9.2Years

62

64

66

68

70

72

74

76

1960 1970 1980 1990 2000 2010

Year

How old do you need to be to "feel like" a 65 year old in the 1960s?--Men in France

9.6Years

The rationale cont

• Employment and “health” (mortality)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Age

Employment by age, US, UK, and France, 2007

US

UK

France

0%

1%

1%

2%

2%

3%

3%

4%

4%

Age

Mortality by age, US, UK, and France, 2007

US

UK

France

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mo

rtality

Age

Employment and mortality by age, men in the US 1977 and 2007

Employment 1977

Employment 2007

Series3

Mortality 1977

Mortality 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 1% 2% 3% 4% 5% 6% 7%

Mortality

Employment by mortality, men in the US, 1977 & 2007

1977

2007

2.7%

1.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mo

rtality %

Age

Employment and mortality by age, men in France 1977 and 2007

Employment 1977

Employment 2007

Series3

Mortality 1977

Mortality 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 1% 2% 3% 4% 5% 6% 7%

Mortality

Employment by mortality, men in FR, 1977 & 2007

1977

2007

2.7%

1.1

Rationale cont—potential for work in the US

• Cutler and Meara (2010)

• Estimate labor force status for people aged 62-64 based on demographic and health characteristics

• Then use estimates to simulate LF status for older groups

0.35

0.53

0.38

0.6

0.080.11

0.010.05

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

HS/Less Any College

Labor force status in the US, with and without Socurity & Medicare Benefits, age 65-69, men

Labor Force Observed

Labor Force Simulated

Series2

Disabbled Observed

Disabbled Simulated

The How (to facilitate longer working lives)

1. Eliminate Social Security provisions that induce early retirement and penalize work at older ages—implicit tax on work. (Must include disability insurance and special unemployment programs.)

2. Abandon false excuses—the “boxed economy” proposition

3. Provide more flexible work arrangements

27

The how 1

• Implicit tax on work

• Compensation from working:– Wage earnings– Increase in future retirement

benefits

• [Decline in PV of benefits if work another year] / [Net earnings if work another year] =[Implicit tax on work]

• Have been increases in LFP since mid 1990s

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Year

Employment of men 60-64, US, UK, FR, 1968-2005

US

UK

FR

The how 2

• Abandon the false “boxed economy” view of the labor market

• From the UK e.g.:“We will extend the voluntary Job Release Scheme to men over 60 so that those who want to retire early vacate jobs for those who are currently unemployed. This could take as many as 160,000 people out of unemployment and into work.” (The United Kingdom: the 1987 Labour Party manifesto says: SOURCE …)

THE BOXED ECONOMY

UnemployedYounger Workers

RetiredOlder Workers

The how 2—no evidence for boxed economy

• Tax force to retire and youth employment

• Within-country “natural experiments”

• Cross-country comparisons

• Panel regression results

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 1 2 3 4 5 6 7 8 9 10Tax force to retire

Tax force to retire, men 55-65 out of the labor force, youth 20-24 unemployed (1995)

55-65 not LF 20-24 U 1995 Log. (55-65 not LF) Linear (20-24 U 1995)

R2 = 0.23

R2 = 0.81

CanadaSpain

Germany

Belgium

Sweden

UK

FranceNetherlands

US

Japan

Italy

0.3

0.6

0.9

1.2

1.5

1.8

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 1 2 3 4 5 6 7 8 9 10Tax force to retire

Tax force to retire, men 55-65 out of the labor force, Youth 20-24 employed (1995)

55-65 not LF 20-24 EMP 1995 Log. (55-65 not LF) Linear (20-24 EMP 1995)

R² = 0.102

R² = 0.811

CanadaSpain

Germany

Belgium

Sweden

UK

FranceNetherlands

US

Japan

Italy

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1971 1993 2005 Diff 71-93 Diff 93-05

Year and difference

Response to reforms in France, 1971-1983 and 1993, unadjusted data

E 55-64

E 20-24

UE 20-24

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

-The 6 countries with

least increase in 55 64 employment

The 6 countries with greatest increase in 55-

64 employment

Difference greatest minus least

Differenc

Comparison of the 6 countries with the least to the 6 with the greatest increase in the 55-64 employment, from

beginning of last upturn in 55-64 employment, adjusted data--difference

E 55-64

E 20-24

UE 20-24

Prime Age 25-54UE EMP

-0.960 0.144(0.260) (0.028)

A one percentage point increase in the employment of older persons reduces the the unemployment rate of youth by -0.905 percentage points and increases the employment rate of youth by 0.486 percentage points.

5-year log difference

Panel estimates of the effect of the LFP of persons 55 to 64 on the unemployment and employment rate of younger persons, with controls

SpecificationUE EMP

-0.905 0.486(0.329) (0.090)

Youth 20-24

No evidence for the boxed economy proposition

• The overwhelming weight of the evidence, as well as the evidence from each of the several different methods of estimation, is contrary to the boxed economy proposition.

43

Conclude

1. Some of the bounty of longer lives must be allocated to prolonging the labor force participation of older workers.

2. Improving health makes this a reasonable response to demographic trends

3. To facilitate longer working lives must:1) Eliminate public and private pension

plan provisions that penalize work at older ages

2) Must abandon the boxed economy view of the labor market