Is a flexible retirement age the answer to everything?
Alongside raising the retirement age for women and increasing the rate of VAT, introducing a flexible retirement age is one of the key components of the “AHV 21 reform” approved by parliament. Not everyone is applauding. Two ZHAW experts give their opinions.
Numerous countries have implemented comprehensive reforms of their pension systems over the past few years. One successful approach has been to introduce automatic mechanisms that align the three adjustment levers of the pension system – the contribution level, pension level and retirement age – to changing demographic and economic conditions (e.g. life expectancy, population development, etc.). These automatic mechanisms are sufficient to ensure the financial sustainability of the pension scheme. Political action is not necessarily required.
“Many countries have raised their retirement age. Why the situation in Switzerland justifies a retirement age of 65 is a mystery.”
Many countries have also raised their retirement age. Denmark, for example, is planning a retirement age of 74, Estonia and Italy 71 and the Netherlands 69. Why the situation in Switzerland should be any different and still justify a retirement age of 65, remains a mystery. The general increase in retirement age in these countries is frequently accompanied by the flexibilisation of retirement. Those who retire later receive a higher pension. Retiring earlier means accepting a lower pension.
Switzerland, by contrast, is having difficulty in reforming its old-age-pension systems. Since the last major AHV reform in 1997, we have basically been incapable of taking any action. Switzerland is increasingly ranking behind other countries. And the sobering conclusion is that we are allowing ourselves to maintain a system that, despite being regulated in an exemplary manner, is neither sustainably financed nor ensures appropriate benefits.
Axel Börsch-Supan, the German expert on economics and demographic change, is doubtless right when he says that it is not demographic factors that constitute the problem for old-age pensions but rather the difficulty in implementing reforms. He recommends tackling the challenges individually. For me, the problem lies in the “watering-can principle”. Why? I illustrate my answer in what follows, taking two frequently cited reasons for not introducing flexibilisation in the pension system.
The question of pension levels must separated from the indisputably important issue of preventing poverty in old age. Many pensioners today are faring better than average in financial terms. A non-sustainable, excessively high pension level based on the watering-can principle also unnecessarily benefits those who do not need it (the density of millionaires among pensioners is particularly high). This results in a lack of solidarity with the younger generation.
For those who are not financially well-off, we have a proven instrument in the form of supplementary benefits (which could certainly be expanded). The statement regarding reduced pensions is also incorrect – pensions are already rising today. The increased number of years for which pensions are paid out, due to our increasing life expectancy, means that the amount of AHV pension paid to each pensioner is constantly increasing – without any increase in the number of years for which contributions are paid. To keep the benefit level stable, monthly pensions ought really to be reduced.
Older unemployed people do indeed frequently have difficulty in finding a new job. And some professions take a very high physical or mental toll. The inflexible watering can of the pension system is not ideal for these challenges either. Most older employees are well integrated in the labour market (with a lower unemployment rate than for younger people) and the shortage of skilled workers is set to increase rather than decrease. Many professions (including university lecturers, for example) and the increasingly good health of the population would allow a large number of people – even if not everyone – to continue working for longer than the generation born in the 1880s. This latter generation received their first AHV pension payment after the second world war (and the retirement age was already set at 65 back then). Flexible solutions must be found in those areas where it is necessary (e.g. solutions in a particular industry).
“An average-sized shoe is too small for one half of the population and too big for the other half.”
Pension systems are redistribution machines of the highest order, as Swiss economist Charles Blankart has stressed. The unsystematic watering-can solution is expensive, non-transparent and frequently fails to have a targeted impact. And it ultimately distorts our view of the actual problems. An average-sized shoe is too small for one half of the population and too big for the other half. Flexibilisation also serves to counteract a much greater danger to a solidarity-based pension system – the creeping trend toward individualisation.
Since we published our study on flexible pension systems in different countries two years ago, certain political changes have come about. Parliament has approved the stabilisation package for the AHV, and the trade unions are mobilising against it. A referendum is presumably going to be held in September.
Interestingly, a great deal of discussion is going on amongst the public on raising the retirement age for women and increasing the rate of VAT for everyone. Much less discussion is taking place on flexibilising the transition to retirement, which would enable a flexible retirement age and the drawing of partial pensions. This aspect is not undisputed either, however.
The bill provides for a flexible retirement age of between 63 and 70 years, coupled with a system of financial incentives. Sixty-five years will then be the reference age for the AHV and the mandatory occupational pension scheme. Anyone taking retirement before the reference age will have deductions made from their pension. Those working longer will be paid supplements. It will also be possible to draw a partial pension aimed at promoting a smoother transition from working life to retirement.
“If older employees remain in work for longer, other specific health measures will be required.”
One motive for introducing flexible pension systems – both in Switzerland and in other countries – is to create an incentive for people to keep working for longer. A further reason is to make greater allowance for the health of older workers by promoting part-time work and aligning the time at which people retire to their individual needs. Both our own research and studies from other countries, however, show that these targets are not necessarily achieved.
In a study we conducted over a prolonged period of time, we investigated into countries that already have a flexible retirement age. This showed that introducing flexible retirement does not necessarily result in people working longer. This finding tallies with a study by Axel Börsch-Supan and colleagues in 2018, which was published in the “Economic Policy” journal. Our study also showed that it is not necessarily people with health difficulties who retire early. This finding is similarly consistent with studies conducted to date. All in all, we were able to show that flexible pension systems have a different impact depending on the particular welfare-state context in which they are embedded. In liberal welfare states such as the USA or Chile, with relatively low pension benefits, the transition to retirement tends to take place later than in Scandinavian countries with generous, comprehensive benefits.
The current draft legislation in Switzerland focuses one-sidedly on a flexible retirement age. But it is not certain whether this will have the effect desired. If the aim is for older workers to keep working longer, then introducing a flexible retirement age might not be enough. Other measures are needed that are related specifically to people’s health, either in general or at points where people get ill or where accidents occur. For this reason, the aspect of partial pensions could be expanded by the explicit option of part-time work. Investments of this kind can be worthwhile not only for the individual concerned but for society as a whole.
In its current form, the bill includes considerations to this effect, since it stresses that part-time work should be promoted. But there are no binding measures in this respect. I personally consider such measures to be important. As is shown in a ZHAW study by Sabine Steiger-Sackmann in 2018, employers and employees in Switzerland do not benefit from a level playing field when it comes to part-time work. While employers can instruct employees to work part time, employees cannot demand it – contrary to countries like the Netherlands or Germany, for example.
“The right to part-time work could be considered as an addition to the AHV 21 reform.”
A study by François Höpflinger in 2019 showed that people who work beyond retirement age almost always work part time. This would suggest that older workers might in some cases already feel the need to work part-time before they reach retirement age. The right to part-time work could therefore be considered by way of an addition to the AHV 21 reform. Such an entitlement does not, however, mean that everyone can afford to just work part time. Further measures would be required here, such as financial cushioning in the form of extended supplementary benefits, especially for people on low wages or those who have interrupted their careers due to parenthood or unemployment, for example.
To keep older workers in the labour market for longer and to maintain and promote their health thus requires more than just making retirement age more flexible.