Savings from an Increase in the Retirement Age and the Employment Potential of Older Workers

If the retirement age is raised the financial burden on public households is lowered in two ways: through a reduction in pension payments and through the increase in income tax revenues and social security contributions. Two effects diminish the savings potential, however: first, some of those who enter into early retirement would otherwise draw unemployment benefits; second, for some employees, a longer working life results in higher pension benefits. If in 1994 the proposed increase of two years in the minimum age for early retirement had been implemented, some 29,000 persons would have had to postpone their retirement. Assuming there is no change in any other legal regulations, the direct fiscal effects amount to savings of Sch 4.962 billion in the first year and of Sch 3.118 billion in the second year. Higher pension benefits for the remaining lifetime result in higher costs. The overall value of discounted savings for 1994 totals Sch 3.254 billion. The results depend to a large extent on the proportion of employees who would be unemployed if the retirement age were raised. This share was put at 40 percent and is equal to the proportion of persons entering into early retirement in 1993 who had been unemployed before retirement. A decrease in the proportion of unemployed to 30 percent would increase total savings to Sch 4.975 billion, an increase to 50 percent would depress total savings to Sch 1.527 billion. This study clearly shows that the fiscal effects of an increase in the retirement age depend to a large measure on how well older workers can be integrated into the labor market.