Facilitating longer working lives: the need, the rationale, the how

DiscussionDidier Blanchet, Insee

Three main points

• Little doubt that longer working lives (WL) must be part of the adjustment to increasing life expectancy (LE)

• But some questions– The why : is increasing LE a sufficient

justification for increasing WLs ? – The how :

• Making postponement pay : is it enough ?• The interaction with job shortages : how far can

we consider that it is a non-problem ?

(A) Lower retirement ages : why reversing the trend ?

• Increasing LE is an appealing justification…• …but LE not new in the history of mankind… • …and, till now, the « bounty » of longer lives has

not been allocated to work, quite the contrary – no one would argue that this has been fully mistaken– a correct argumentation must address this puzzle

• Key explanation of the puzzle: – productivity gains…– …that are not expected to stop, at least under

baseline scenarios

All this requires closer examination

Reversing the trend : more elaborate reasons?

• A change in the relative intensity of productivity and LE effects :– Acceleration of LE, not compensated anymore

by demographic growth– Deceleration of productivity

• Changes in the nature of productivity gains ?• Resistance to mandatory levies, competition

with other social needs ?• All these are potential candidates but mean

that the problem is more complex than what simple demographics suggest

A problem that remains complex : one further illustration

• Joint paper with F. Toutlemonde (Revue Economique, Sept 2008)

• Optimal allocation or training/work/leisure over the life cycle.

• Shows that an equal sharing of LE between T, W and L requires, inter alia :– Consumption norms that move in parallel with

productivity– A depreciation profile for human capital that moves in

parallel with LE• Even if the latter condition seems roughly fulfilled

for health capital, less warranted for skills• Still more problematic at the micro-level :

– the problem of one-size-fits-all policies

(B) The how : making postponement pay ?

• One of the main messages from the first volume of the ISS project

• For France : high « subsidy » to working before the NRA, high taxation above

• The 2003 reform has tried to remove this double anomaly– The profile of benefits around the NRA is

now close to actuarial neutrality – But the impact on effective retirement ages

has remained limited up to now• Here again, a closer look is required

Reinforcing actuarial neutrality: what are the limits ?

• In fact, the impact of simply restoring AN around a given pivotal age is ambiguous– Can lead either to earlier or later retirement– And, in both cases, no long run impact of

pension expenditures

• It is only through rightward or downward movements of the profile that pension expenditures can be controlled Graphical illustration

Restoring AN versus global moves of the benefit profile

Avant réformes

A

Replacement rate

Retirement age

Restoring AN : what for ?

• No miracle : pension costs can be contained only by reducing the generosity of the system– 1993 : rightward and downward shifts– 2003 : rightward shift– 2010 : translation of the window

• AN : a more subsidiary role, albeit with some obvious virtues :– Lower penalties for those who are obliged to leave

early– Possibility to limit the degradation of pension levels

for those who can go on working

(C) Raising RA under mass unemployment : what are the limits ?

• The « why » and the « how » are already complex questions in a full employment setting

• Still more difficult when U rates are high– The optimist view : RA and U are fully

independant variables– Looks plausible in the long run, but

conflicting with common sense

• Can we overcome the contradiction ?

RA and the unemployment rate (1)

• Results from the last NBER volume useful to reverse the burden of the proof

• But identifying a causal effect of retirement policies on U has been difficult

• And mainly based of experiments of decreases in RA’s and or increases that have occured under relatively favourable macroeconomic conditions– Possibility of an asymetric reaction– We cannot fully rule out that labour demand may

react only very progressively to increases in RA.

RA and the unemployment rate (2)

• The short run/long run articulation may help reconcile opposite views about the « boxed economy » hypothesis.

• Not an argument in favor of inaction, but calls for some cautiousness and attention to demand side policies