As populations are aging, governments around the world are looking for ways to stretch pension programs to accommodate large numbers of retirees. One option is to raise the minimum retirement age, as Germany did in 1999, upping the retirement age for women from 60 to 63. Economists Johannes Geyer and Clara Welteke analyze the impacts of this policy shift in a Journal of Human Resources preprint article. They wanted to know whether women over 60 changed their labor market status as a result of the reform. Did employed women stay in their jobs longer or use unemployment or disability benefits as a way to exit the labor market? Geyer and Welteke joined us to discuss their findings.
Why did you decide to pursue this topic?
Population aging is an enormous challenge for the financial sustainability of public pension systems of many OECD (Organisation for Economic Co-operation and Development) countries. Germany is facing a rapid increase in the old-age dependency ratio in the coming years. Already every second person in Germany is over 45 years old and every fifth person is over 66 years old. One way to increase the financial sustainability of the pay-as-you-go pension system is to increase the legal retirement age, thereby extending contribution periods whilst simultaneously decreasing pension expenditures. However, legal retirement age increases often have undesired distributional effects. Furthermore, workers may not be able or willing to work longer and may choose other exit routes from employment. Thus, it is of great importance to gain empirical evidence on the effects of pension reforms that increase retirement age thresholds. Our goal is to gain insights into the effects of this important question and inform policy makers.
What is one takeaway from this research that you’d like to communicate to policy makers?
The increase in the early retirement age for women in Germany resulted in a large employment increase in the affected age group (60- to 63-year-olds). One could conclude that the reform was a success and recommend similar measures for other countries and groups. However, the reform was successful in increasing employment because the labor market was in a good state and women were able to continue their employment. We also find that inactive and unemployed women remain longer in their respective status due to the reform. Another factor was the early announcement of the reform, which gave enough time to adjust career plans.
As a main takeaway, we recommend early retirement age increases as an effective tool to increase employment of the affected group, if labor market perspectives and the health of workers enable such an extension of their working life. Retirement age increases should be announced well in advance and those who are not able to work longer should be offered appropriate support, such as disability pension schemes.
What’s one question that emerged from your research that you’d like to follow up on, or that you hope someone else will explore in the future?
One of our results was that non-working women affected by the pension reform did not return to the labor market while employed women stayed in employment. In a follow-up project, we look at the distributional effects of the pension reform at the household level. More specifically, we wanted to know if the pension led to increased income inequality. Our results suggest that the distribution of available household income is not affected by the reform. One reason for this result is program substitution. The study is forthcoming in Labor Economics. In a current project, we look at health effects of the reform. We use administrative data from German health insurance that contain detailed information about individual diagnoses from medical practitioners’ records. Preliminary results suggest that the reform led to an increase of psychological symptoms.
What are some of the ways in which raising the retirement age could theoretically backfire on governments? Did you find any evidence that this is happening in the case of Germany?
The reform can be considered a success in retrospect. It did not lead to an increase in unemployment or large increases in disability pensions. However, the positive employment effect is strongly related to the good labor market performance at the time. Our results also show that women at this pre-retirement age do not react very flexibly to changing conditions. The results would have been different if Germany had experienced a large recession. Interestingly, this result is also found in other countries, like Australia and Austria. Therefore, governments should also invest more in labor market opportunities for older workers and develop better strategies to bring the older unemployed back to work.
Johannes Geyer is deputy head of the department of public economics at DIW Berlin. He earned his PhD in Economics in 2012. Between 2012 and 2016 he was a visiting professor at Humboldt-Universität Berlin, in addition to his work at the DIW Berlin. His research focuses on issues of social protection and demographic change. For this he uses empirical methods of microeconometrics and microsimulation.
Clara Welteke is an economist at the German Federal Ministry of Finance since April 2019. Her work focuses on pension provision and the sustainability of public finances. Previously, Clara was a researcher at the Public Economics Department and the Gender Economics Research Group at the DIW Berlin. Clara received her PhD from the Free University Berlin and the DIW Graduate Center in 2017. She holds a Bachelor’s degree in Philosophy & Economics from the University of Bayreuth and a Master’s degree in Econometrics and Mathematical Economics from the University of Amsterdam. After completing her Master’s degree, Clara worked as a consultant for the World Bank. During her doctoral studies, she worked for the OECD in Paris and the European Commission in Brussels.