Social Security Programs and Retirement around the World – The Capacity to Work at Older Ages (National Bureau of Economic Research Conference Report) - Hardcover

Wise, David A.

Hardcover

ISBN 10: 022644287X ISBN 13: 9780226442877

Publisher: University of Chicago Press, 2017

Synopsis

In recent years, the retirement age for public pensions has increased across many countries, and additional increases are in progress or under discussion in many more. The seventh stage of an ongoing research project studying the relationship between social security programs and labor force participation, Social Security Programs and Retirement around the World: The Capacity to Work at Older Ages explores people's capacity to work beyond the current retirement age. It brings together an international team of scholars from twelve countries Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, the United Kingdom, and the United States to analyze this issue. Contributors find that many but not all individuals have substantial capacity to work at older ages. However, they also consider how policymakers might divide gains in life expectancy between years of work and retirement, as well as the main impediments to longer work life. They consider factors that influence the demand for older workers, as well as the evolution of health and disability status, which may affect labor supply from the older population.

About this title

About the Author

David A. Wise is the John F. Stambaugh Professor of Political Economy Emeritus at the John F. Kennedy School of Government at Harvard University. He is the former area director of Health and Retirement Programs and director of the Program on the Economics of Aging at the National Bureau of Economic Research.

Excerpt. © Reprinted by permission. All rights reserved.

Social Security Programs and Retirement around the World

The Capacity to Work at Older Ages

By David A. Wise

The University of Chicago Press

Copyright © 2017 National Bureau of Economic Research
All rights reserved.

ISBN: 978-0-226-44287-7

Contents

Acknowledgments, 
Introduction Courtney Coile, Kevin Milligan, and David A. Wise, 
1. Work Capacity and Longer Working Lives in Belgium Alain Jousten and Mathieu Lefebvre, 
2. Health Capacity to Work at Older Ages: Evidence from Canada Kevin Milligan and Tammy Schirle, 
3. Health Capacity to Work at Older Ages in Denmark Paul Bingley, Nabanita Datta Gupta, and Peder J. Pedersen, 
4. Health Capacity to Work at Older Ages in France Didier Blanchet, Eve Caroli, Corinne Prost, and Muriel Roger, 
5. Healthy, Happy, and Idle: Estimating the Health Capacity to Work at Older Ages in Germany Hendrik Jürges, Lars Thiel, and Axel Börsch-Supan, 
6. Health Capacity to Work at Older Ages: Evidence from Italy Agar Brugiavini, Giacomo Pasini, and Guglielmo Weber, 
7. Health Capacity to Work at Older Ages: Evidence from Japan Emiko Usui, Satoshi Shimizutani, and Takashi Oshio, 
8. Work Capacity at Older Ages in the Netherlands Adriaan Kalwij, Arie Kapteyn, and Klaas de Vos, 
9. Health Capacity to Work at Older Ages: Evidence from Spain Pilar García-Gómez, Sergi Jiménez-Martín, and Judit Vall Castelló, 
10. Health, Work Capacity, and Retirement in Sweden Per Johansson, Lisa Laun, and Mårten Palme, 
11. Health Capacity to Work at Older Ages: Evidence from the United Kingdom James Banks, Carl Emmerson, and Gemma Tetlow, 
12. Health Capacity to Work at Older Ages: Evidence from the United States Courtney Coile, Kevin Milligan, and David A. Wise, 
Notes, 
Contributors, 
Author Index, 
Subject Index, 

CHAPTER 1

Work Capacity and Longer Working Lives in Belgium

Alain Jousten and Mathieu Lefebvre

1.1 Introduction

Previous waves of this project studied the effect of financial incentives created by formal and de facto (early) retirement programs on an individual's decision to retire, the fiscal impact of such behavior, and reforms' impact thereon. Furthermore, the impact of (early) exits on youth employment and the respective roles of health and program rules as determinants of disability program enrollment have been studied (Dellis et al. 2004; Desmet et al. 2007; Jousten et al. 2010; Jousten, Lefebvre, and Perelman 2012, 2016).

One aspect that most of these papers have essentially bypassed is work-capacity issues. This neglect is all the more striking in a country like Belgium where the public-sphere pension reform debate is to a large degree dominated by such aspects. For example, one often-voiced concern in the debate on prolonging the working life of Belgian workers is that numerous workers do not have the capacity to work longer (even if they wanted or were pushed to) because of physical or mental health and exhaustion problems, or because psychological or material limitations render continued work impossible.

The most extreme incarnation of this concern is the so-called "arduous jobs" discussion that has been raging with particular emphasis since the current coalition government — in power since the middle of 2014 — has embarked on a broader pension-reform project targeting longer effective working lives. This is achieved by closing or delaying early retirement options and working toward a convergence between the various public pension schemes for wage earners, civil servants, and the self-employed. While the government strategy's main thrust mirrors recommendations of a report published by an Expert Committee on Pension Reform 2020–2040 (Expert Committee 2014), individual policy measures show differences between the expert committee and the government proposals.

The broader literature provides some evidence on the link between health and work capacity. For example, relying on indicators of self-assessed health, Van Looy et al. (2014) note that subjective health levels are not any different between those who reduced their working time and those who did not. In contrast, Desmette and Vendramin (2014, 79) find that "positive evaluations on 'general health,' 'physical health' (backache, muscular pain in the upper body, muscular pan in the lower body), and 'psychological health' (depression or anxiety, fatigue and insomnia) are at the highest levels for those who think their current job is sustainable." Similarly, Jousten and Lefebvre (2013) estimate a retirement model for Belgium including health as an explanatory variable and find that it plays a statistically significant role in the individual retirement decision.

The literature, however, also cautions that work ability is only one — though very important — step in the process of keeping individuals at work. Schreurs et al. (2011) argue that "good health may be a necessary but not sufficient condition for retaining older workers," and hence "creating and sustaining a healthy workforce by no means guarantees that older employees will continue working until their official retirement age" as workplace, domestic, or other factors may also influence individuals' effective labor market attachment.

The present chapter focuses on the "necessary condition": good work ability as a precondition for higher employment. In our approach, we focus on the outcome indicator "employment rate" (see figures 1.1 and 1.2) and link it to general indicators of the healthiness of the older population as measured by the mortality and self-assessed health (SAH) of figure 1.3. These figures demonstrate that as we move up across age cohorts at any given point in time, employment rates fall substantially for both sexes — and this despite a generalized upward trend since the mid-1990s. While this decline is part age and part cohort effect, the question remains as to what the impact of health on these trends is.

Section 1.2 proposes an analysis using the Milligan and Wise (2015) methodology, essentially linking mortality and employment across time for those age fifty-five and older. Section 1.3 replaces mortality by a series of health conditions and explores the link between these factors and employment rate at younger ages (fifty to fifty-four) in a first step. In a second step, it proposes a simulation of employment potential at higher ages based on these first-step parameters. Section 1.4 concludes.

1.2 Milligan-Wise Method

Figure 1.4 is a good starting point both for exploring the facts about mortality across time in Belgium, as well as the methodology of Milligan and Wise (2015). The figure plots the instantaneous mortality rate of the Belgian male population as extracted from the Human Mortality Database against the male employment rate in the country as extracted from the EU Labour Force Survey (EU-LFS). We focus on the male population, as Belgian females have experienced a seminal trend toward higher levels of employment and labor force participation over the last decades, hence rendering an isolation of the health from the structural effects hard to implement. The plot of figure 1.4 is done for two years: the recent year, 2012, and a latest possible reference year in the past, 1983. The two outstanding — though unsurprising — facts are: (a) a strong negative relation between mortality and employment rate as age increases, and (b) a seminal trend in mortality rates at equal ages as represented by a leftward shift of the curve across time.

For the purpose of the present section, the focus lies on exploring work capacity for the older population (ages fifty-five to seventy-four), that is, those that are either below the normal retirement age or just a few years above. Leaving from the plot of figure 1.4 corresponding to the year 2012, we draw two vertical dotted lines at two bounds of the age interval of interest: one corresponds to the mortality rate observed at age fifty-five in the year 2012 of approximately 0.6 percent, and the other one to the mortality rate of 3.2 percent at age seventy-four in 2012.

The approach of Milligan and Wise (2015) then explores employment rates at equal mortality rates across time, rather than at equal ages. For example, the mortality rate of 0.6 percent as observed for a fifty-five-year-old in 2012 corresponds to an employment level of 71 percent, while in 1983 the same mortality rate was observed for a fifty-year-old with a corresponding employment rate of 89 percent. Thus, if men had the same employment rate as their equal-mortality peers in 1983, this would lead to an 18 percentage points larger employment rate in 2012. Expressed differently, 18 percent of men age fifty-five could have worked one more year, corresponding to an average gap of 0.18 years of work for that specific age group.

Similar calculations were done for all ages in the relevant range of fifty-five to seventy-four in 2012 and the results are reported in table 1.1. They indicate that if employment rates at equal mortality would have stayed constant, then the sum of the age-specific average gains of working years would add up to an additional employment capacity for the male population under study of 4.3 "years of work." This number is derived as the simple arithmetic sum of average year-of-work gains for each age cohort.

To understand the meaning and significance of this result of an extra 4.8 potential "years of work," three important elements need to be considered. First of all, the equivalence between extra employment potential (e.g., the 18 percentage points for a fifty-five-year-old in 2012) and "years of work" implicitly assumes that these extra workers would work the same hours/days/months than those that actually work. If this were to be different — either because those that currently work or those that could join work significantly less or more than the others — the equivalence would no longer hold.

Second, the total gain in years of work is a theoretical construct and has to be understood as such. For example, as the above number of 4.8 is the simple sum of potential years of work gains by age in the relevant range from fifty-five to seventy-four, it ignores any size and compositional differences between the various age cohorts. Also, and more substantially, the number is hard to interpret in a meaningful way unless one compares it to the theoretical maximum and/or currently observed years of work. As the maximum work potential by age is 100 percent (corresponding to an average year of work for that age group of 1), the total maximum years of work for the entire fifty-five to seventy-four cohort is twenty years. Expressed differently, the extra potential work capacity represents approximately 25 percent of total employment capacity, and is slightly less than the currently observed years of work of 5.1 that one can derive from the age-specific employment rates using the same methodology. In sum, results controlling for mortality improvements indicate that there is unused work capacity that could be activated to achieve almost a doubling of current levels of employment.

Third, the structure of employment and mortality rates of the chosen reference year has a strong impact on the outcome of the simulation. For example, no fundamental mechanism ensures a systematic leftward shift of the employment-mortality relation when moving across time. Furthermore, even a lack of a visible leftward shift does not mean that there was no change — in fact, situations may arise where negative extra employment capacity is derived, that is, where workers work more in 2012 than in the reference year considered, be it for a specific age or for the whole fifty-five to seventy-four cohort.

Figure 1.5 illustrates this point. It provides the same information as figure 1.4, but this time for the different baseline year of 1997 — chosen because it corresponds to the year where the employment rate for the age cohort considered was historically at a low point before increasing again since then. Even though the curve barely moved in the employment-mortality rate space, there is a shift of the corresponding points for any given age up "along the curve" toward the northwest. Expressed differently, at any given age the mortality rate in 2012 is lower than in 1997, and the corresponding employment rate higher.

Figure 1.6 summarizes the findings in terms of extra years of work for the entire fifty-five to seventy-four age cohort for all possible reference years from 1983 to 2011. The graph shows that the additional employment capacity is close to zero when referencing across the last ten years, given increases in employment and decreases in mortality essentially canceling each other out. The sharpest changes could be derived if we take as reference the years farthest in the past, where both factors compound.

1.3 Cutler, Meara, and Richards-Shubik Method

The second method we employ for exploring the potential for additional employment of the older population age fifty-five to seventy-four is the method pioneered by Cutler, Meara, and Richards-Shubik (2012). The basic idea of this approach is to estimate a labor force participation model at a lower age (e.g., those age fifty to fifty-four) that includes demographic, health, and other socioeconomic variables as explanatory variables. The coefficients thus obtained are then applied to the realizations of these very same variables for the older cohort fifty-five to seventy-four to "predict" their labor force participation, in this way controlling for the effect of health or other controlled-for differences between older and younger cohorts.

Our technical approach slightly deviates from Cutler, Meara, and Richards-Shubik (2012) in that we focus on employment as the key dependent variable instead of labor force participation. The slightly different angle can be rationalized by the fact that in countries like Belgium, where early retirement by means of unemployment benefits is prevalent (be it technically as an early retiree or an unemployed), employment likely is the better outcome indicator.

We use (and pool) data from the Survey on Health, Ageing and Retirement in Europe (SHARE), waves 1, 2, 4, and 5, collected between 2004 and 2013. The survey is a cross-national panel database of micro data on health, socioeconomic status, and social and family networks of European individuals age fifty and older conducted since 2004–05. It covers a broad range of variables of special interest for this study, such as objective information of health, self-assessed health, and occupational status.

Our empirical approach is to estimate (ordinary least squares [OLS] regression) the employment model for the "young" age group (fifty to fifty-four) of men and women separately, and then apply its predictions to the older cohorts (fifty-five to seventy-four). We have a sample of 1,226 male and 1,558 female observations between age fifty and fifty-four that we rely upon for the regressions, and apply the simulations to almost 9,000 observations at older ages. Summary statistics of the survey population are provided in tables 1.2 and 1.3 for the various five-year age cohorts and by sex.

In the regressions reported in table 1.4, we use a single health measure: the PVW health index, as introduced and defined in Poterba, Venti, and Wise (2013). The idea behind the PVW is simple: apply the principal components technique to the twenty-four objective and subjective health measures reported in tables 1.2 and 1.3. These include self-assessed health and various health conditions, as well as the prevalence of physical limitations, and so forth. In a second step, use the first principal component to predict a health score of the individual. Finally, the individual's score is positioned in a given percentile of the overall population used in the estimation. The score of an individual thus generally varies for across-survey waves because the health outcomes and perceptions likely vary across time. Poterba, Venti, and Wise (2013) show that the indicator traces mortality trends rather well at the individual level.

The results of table 1.4 suggest that the PVW index plays a substantial and positive role; that is, a better health score leads to more employment. Marital status plays a substantial role for men and women, though in the opposite direction — likely the result of the primary versus secondary earner status. The higher educated, as well as civil servants, are more likely to be employed for both sexes, while the required skill level for a job only seems to play significantly differently for men and women in high-qualifying jobs, whereas a significant difference can only be observed for their male low-educated counterparts.

Table 1.5 uses the estimates of table 1.4 and applies them to the older cohorts to predict work capacity based on the exogenous variables of the regressions. The table indicates that when controlling for health, work capacity clearly decreases with age, but in a rather unspectacular manner. Predicted work capacity at age seventy to seventy-four is simulated to be around 77 percent for men and 58 percent for women. These numbers are orders of magnitude larger than the ones corresponding to the actual observed employment rate in the country. Figures 1.7A and 1.7B display the same information in a more visual manner, essentially showing the large potential for extra employment that one would predict using this method. To compare these results to the ones from table 1.1, we again apply a simple "synthetic" indicator of gains in years of work derived by adding up the additional work capacity across the entire age range of fifty-five to seventy-four. We obtain indicators of 11.6 and 9.3 years of extra work for men and women, respectively, hinting at a much stronger projected potential for this forward-looking method rather than the "backward-looking" Milligan-Wise methodology.

Given the generally large differences in employment outcomes observed in Belgium, we also applied the same approach by splitting the population along the education dimension. Results of the regressions are reported in table 1.6. They reveal some interesting differences with those presented in table 1.5. First, the positive and significant (surprising) coefficient for male civil servants disappears. While table 1.5 might have been interpreted that civil servants' behavior actually differs, be it because of the completely different social protection environment than their salaried counterparts or for some other reason, table 1.6 indicates that this specific finding was more likely the result of interactions between the different explanatory variables education, scheme, and skill.

(Continues...)

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Edition details

• Publisher: University of Chicago Press
• Publication date: 2017
• Language: English
• ISBN 10: 022644287X
• ISBN 13: 9780226442877
• Binding: Hardcover
• Number of pages: 408