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

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 –A–An important indicator of health and –A–Available on comparable basis in all countries Also decline in disability and potential for work (US)

The rationale cont Decline in disability—US

Share Age Share of Men in Fair or Poor Health: mid-1970s and mid-1990s Source: Cutler and Liebman 11 Years

The rationale cont Decline in mortality—US, UK, France

Age Year How old do you need to be to "feel like" a 65 year old in the 1960s?--Men in the UK 9.8 Years

Age Year How old do you need to be to "feel like" a 65 year old in the 1960s?Men in the US 9.2 Years

Age Year How old do you need to be to "feel like" a 65 year old in the 1960s?--Men in France 9.6 Years

The rationale cont Employment and “health” (mortality)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Employment rate Age Employment by age, US, UK, and France, 1977 US UK France

0% 1% 2% 3% 4% Mortality rate 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% Mortality Employment 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% Employment Mortality Employment by mortality, men in the US, 1977 & % 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% Mortality % Employment % 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% Employment Mortality Employment by mortality, men in FR, 1977 & % 1.1

Rationale cont—potential for work in the US Cutler and Meara (2010) Estimate labor force status for people aged based on demographic and health characteristics Then use estimates to simulate LF status for older groups

HS/LessAny College Proportion 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

Proportion Year Employment of men 60-64, US, UK, FR, 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 Unemployed Younger Workers Retired Older 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

Proportion Tax force to retire Tax force to retire, men55-65out of the labor force,youth20-24unemployed(1995) 55-65not LF20-24U1995Log. (55-65not LF)Linear (20-24U1995) R 2 =0.23 R 2 =0.81 Canada Spain Germany Belgium Sweden UK France Netherlands US Japan Italy

Proportion Tax force to retire Tax force to retire, men55-65out of the labor force,Youth20-24employed(1995) 55-65not LF20-24EMP1995Log. (55-65not LF)Linear (20-24EMP1995) R²=0.102 R²=0.811 Canada Spain Germany Belgium Sweden UK France Netherlands US Japan Italy

Diff 71-93Diff Rate Year and difference Response to reforms in France, and 1993, unadjusted data E E UE 20-24

The6countries with least increase in5564 employment The6countries with greatest increase in55- 64employment Difference greatest minus least D i f f e r e n c Comparison of the6countries with the least to the6with the greatest increase in the55-64employment, from beginning of last upturn in55-64employment,adjusted data--difference E55-64 E20-24 UE20-24

Prime Age UEEMP (0.260)(0.028) A one percentage point increase in the employment of older persons reduces the the unemployment rate of youth by percentage points and increases the employment rate of youth by 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 Specification UEEMP (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