Working Longer is Good for People and the Bottom Line

EARLY RETIREMENT AND SENIORITY WAGES NEED TO BE SHELVED, IF THE LOOMING CRISIS IN PUBLIC FINANCE IS TO BE AVERTED AND THE WELFARE OF AGING EMPLOYEES IS TO BE IMPROVED

by Vincenzo Galasso, Dept.of Policy Analysis and Public Management, Bocconi
Translated by Alex Foti

For several decades in the West, the increase in longevity went hand in hand with a reduction in the years spent at work. In the 1960s, life expectancy shot up, while people started to retire earlier than before. The conjunction of these two trends created quite a few problems for public finance, and for social security spending in particular. So starting in the late 1990s, several European countries, including Italy, have reformed their public pension systems so to postpone the age of retirement.

The modus operandi common to all social security reforms has been a reduction in the generosity of pension payments and an increase in the minimum statutory age for retirement. This followed the findings of twenty years of economic research, which had looked at the financial, family, and health motivations of prospective pensioners, thereby leading to a drastic reduction of the incentives senior employees were given to retire as early as possible.

However, early retirement could well be the employer’s, rather than the employee’s, choice. In economies where wages grow according to seniority, older workers (over 55 years of age, say) translate into higher labor costs that are not matched by higher productivity. Firms thus have an interest into the early retirement of less productive senior workers, especially if the labor market is rigid enough to discourage dismissals.

In the 1970s and 1980s, the introduction of generous government schemes for early retirement had the virtue of finding workers, unions, and companies in agreement, but at the cost of putting an escalating burden on taxpayers. As recent studies have highlighted, even in countries with flexible labor markets and complementary private pensions like Switzerland, companies have chosen to resort to early retirement to rejuvenate the labor force and increase competitiveness.

But what will happen over the next few decades, when the labor force ages substantially and most of the baby-boomers go into retirement? How will firms manage when they can no longer rely on early retirement? How will they manage a graying, costly and less productive work force? Demographic trends call for a paradigm change for employers and workers alike.

Recent studies show that the productivity of more senior workers can stay high and that employees are the first beneficiaries of this. In fact, continuing to work is an antidote to cognitive decay, and the loss of mnemonic and analytic skills that comes with age. But companies will have to learn how to manage their grey panthers. The most enlightened among them have set up programs to keep their workers fit as they age. However acting on productivity is not enough, the cost of labor of senior employees must come down and the seniority principle needs to be shelved. The battle on this front has just started.