Rewarding early retirement creates fiscal burden

July 31, 2012

Free Market Foundation

The United States is not alone in dealing with the challenge of paying out retirement benefits to an aging workforce. Indeed, many nations are facing the prospect of fewer workers supporting more pensioners.

A study from the National Bureau of Economic Research (NBER) shows that paying workers to retire early, as is common in many Western European countries, increases government costs and creates incentives for individuals to shorten their employment years.

For example:

When Denmark introduced a Post Employment Wage Programme in 1979, the labour force participation rate of men aged 60 to 64 declined by 17 per cent.

In the Netherlands, workers who choose not to retire early can lose up to 40 per cent of their government retirement benefits.

On the other hand, reducing payouts for early retirement and rewarding individuals who choose to remain in the workforce will significantly reduce government costs through delaying benefits and increasing tax revenues, says the NBER:

Increasing age eligibilities for reduced benefits and full benefits by three years would reduce government costs by about 27 per cent in 12 countries (including the United States).

Germany, France, Italy and Spain would save more than 40 per cent of their social security costs by raising the early retirement age to 60, raising the normal retirement age to 65 and setting pension levels on a fairer basis depending on the age of retirement.

Indeed, the German government reduced retirement benefits for individuals retiring before age 57; as a result, the growing percentage of men retiring early was reversed in 1997.

In 1995, the labour force participation rate in the United States began increasing after a downward trend. While researchers are uncertain as to the cause, they attribute it to the decline in employer-sponsored pensions and the increase in personal retirement plans.

Sources: David R. Francis, Social Security Woes are Felt Worldwide, Christian Science Monitor, May 26, 2005; and Jonathan Gruber and David A. Wise, Social Security Programs and Retirement Around the World: Fiscal Implications, National Bureau of Economic Research, Working Paper 11290, April 2005.

For text: http://www.csmonitor.com/2005/0526/p17s01-cogn.htm

For study: http://www.nber.org/papers/w11290

For more on Workforce Participation: Older Workers: http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 28 June 2005