Let old folk work

The Economist
September 4th - 10th 1999

Twisting older people’s arms to retire early is both illiberal and foolish

WHEN that Grand Old Man of Victorian England, William Ewart Gladstone, was in his 85th year, he was steering the second home-rule bill for Ireland through a recalcitrant parliament and going home to translate the odes of Horace at night. When Ronald Reagan reached the tender age of 73, he was fighting his second presidential election campaign. Alan Greenspan, the world’s most successful central banker, is also 73. Politics and economics are plainly jobs that the old can do well. They are not alone. The boardrooms of the world’s big companies are full of non-executive sages, telling whippersnapper 40-something's how to run their firms.

Why, then, are so few of the rich world’s older folk in employment? They live longer and enjoy better health than their parents did. Most jobs have become less physically demanding; most people in late middle age are well educated; most evidence suggests that training older workers, if done sensibly, is no harder than training the young. But the figures show an astonishing and long-drawn-out retreat from the job market (see article). As recently as 1960, men could expect to spend 50 of their 68 years of life in paid work. Today, they are likely to work for only 38 of their 76 years. Fewer than two-thirds of men in their late 50s and early 60s are in the rich world’s labor force. Indeed, by the time they celebrate their 55th birthday, more than half of Europe’s men have gone home to translate Horace.

For most, that is something to celebrate. Never before have so many people been able to look forward to so many years of healthy leisure. Two-thirds of people say that they like being retired and have no desire to go back to work. There are grandchildren to enjoy, foreign countries to visit, books to read and golf games to play. The pleasures of old age are less expensive, and more widely available, than ever before.

Silver-haired lining

The big question is whether all of this retirement is voluntary. It is worth asking for its own sake; in a liberal society, the old, too, should be free to choose. But, in addition,the stampede to retire has consequences not merely for the old themselves. And it is often being encouraged by perverse public policy.

Widespread and early retirement will increasingly affect the lives of everyone else, for two reasons. The first is a familiar one: as the share of old folk in the population rises, so will the burden on the young of paying for their pensions and health care. The second is less discussed: the rise of the gray-headed leisured class has consequences for economic growth, because of its impact on the supply of labor and of capital.

Many governments, their eyes focused on the impact that future pensions claims will have on public finances, have embarked on reforms—but not always reforms that give pensioners a freer choice. For their eyes are also trained, in the shorter term, on high unemployment. Governments, especially in Western Europe, are pressing more people to retire early, on the mistaken view that this will provide jobs for the young, even as they try to trim pensioners’ entitlements in order to reduce the burden on public finances. This is unforgivable from a liberal point of view. It is also foolish from the perspective of public policy.

The sheer size of the baby-boom generation that starts to reach retirement age over the coming decade means that there will be a simple, but huge imbalance: too few people in work, paying taxes and pension contributions; too many in retirement, drawing on pensions and running up health costs. In that case, the main alternatives will be to renege on the pensions that workers thought they had been promised, or to raise taxes. It would be far better for the health of economies if more older people went on working instead. Quite small rises in the ages at which people retire have large effects: as long as older folk stay in the job market, they pay taxes (helping one side of the fiscal balance) and draw either no pension, or a smaller one (helping the other).

Governments should recognize that people (like politicians) would prefer to decide for themselves when to retire. At present, the choice is, perversely, biased in favor of retirement. For example, in many countries, the opportunity cost of working beyond the minimum retirement age is high: workers must often leave the job market in order to receive a state pension, and even where this is not the case, they rarely earn any extra pension for their additional taxes and contributions. If they claim disability benefit, as many in their late 50s and early 60s do, their pension rights are rarely affected. Such perverse incentives should be replaced with neutrality.

Employers, often urged on by trade unions, also put obstacles of their own in the way of older workers. Pension schemes based on defined benefits make it disproportionately expensive to offer jobs to older people. Pay schemes that reward long service more than merit and productivity make it disproportionately costly to keep older workers on the payroll. And sheer discrimination, formally banned in the United States but flourishing in most countries, persuades many older folk to go home rather than risk probable rebuff.

Would such changes coax 60-year-olds off the golf course? In America, where jobs for older workers are plentiful and the government is scrapping the tax disincentives for older folk to work, early retirement has begun to fall. Give people a choice, and they might surprise you.

Related Links:

- Aging workers

- Let old folk work

- Genes Don't Predict Destiny

- The Age Factor

- * “Gray Dawn”. Times Books, 1999

- † “Agequake”. Nicholas Brealey, 1999

- ** “The Evolution of Retirement”. University of Chicago Press, 1998

The OECD has conducted extensive research on the economics of aging. The work by the Committee on Economic Development is described at its site. The Urban Institute’s collection of research reports on social security and retirement can be downloaded (in PDF format). Alan Walker’s research is published by The European Foundation for the Improvement of Living Conditions. A summary of Joseph Quinn's research is here.

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