What Politicians and Companies Can Learn from Other European Countries
By Stephan Sievert, Ulrike Berger, Steffen Kröhnert and Reiner Klingholz
In the coming years, demographic change in Germany will disproportionally affect the population of working age. This will have repercussions for both the economy and the social security system. Since the number of working people will fall more rapidly than the total population fewer products and services will be available for each individual. At the same time, the cost of social security will rise.
German policy-makers have been following various strategies to deal with this situation for a number of years now. One of them has been to integrate older workers better in the labour market. The official retirement age has been raised to 67, and incentives have been created to encourage a greater proportion of those nearing retirement age to go on working. These policies have enjoyed some initial success. The employment rate of 55- to 64-year-olds increased from 38.6 percent in 2002 to 61.5 percent in 2012. This improvement can in large part be attributed to higher female employment. Germany now ranks among the continent’s better performers in terms of employment among older people. However, significant problems remain. Low-skilled workers generally lag behind other groups when it comes to working between 55 and 64, and older workers are particularly susceptible to long-term unemployment.
Closing in on the top
What politicians can do
While boosting employment among older people is a challenge for all societal actors, there are a number of important tasks that fall within the realm of politics. In particular, politicians should take measures to increase the supply of and the demand for older workers.
To increase supply, politicians need to abolish what remains of the once comprehensive incentives for early retirement and adhere firmly to their decision to raise the retirement age to 67. In the long run, life expectancy gains of 65-year-olds should automatically translate into a higher official retirement age. To keep the ratio between working life and retirement constant at roughly two to one, it is advisable to add eight months to the length of working life and four months to retirement for each additional year of life expectancy.
Expanding flexible retirement options would be another way to increase the supply of older workers. Many older people wish to gradually “phase out” their working life instead of going from 100 to zero percent in one step. They would be willing to work longer if they could do so part-time and without incurring heavy income losses. To make gradual retirement more attractive, opportunities for receiving partial pensions should be expanded. Especially the rather strict limits on retirees supplementing their pensions by continuing to work after retirement should be liberalised.
How can demand for older workers be increased? A good start would be to launch information campaigns to counter the largely unfounded stereotype of older workers being less productive than their younger colleagues. But campaigns alone are unlikely to successfully combat long-term unemployment among older people. Active labour market policies are also required. In particular, temporary wage subsidies, which insure employers against some of the risk inherent in hiring new personnel, have proved useful in other countries and could become more widespread in Germany too. Moreover, training programmes have shown good results abroad as long as they are designed properly, i.e. in close cooperation with businesses.
Nevertheless, training should be understood as a part of a process of life-long learning rather than only beginning once unemployment is a fact. The government could support this by offering financial incentives to hitherto disadvantaged groups such as low-skilled workers and small enterprises.