Stricter Sickness and Disability Insurance Systems and Early Retirement

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1 ISF Report 2014:7 Stricter Sickness and Disability Insurance Systems and Early Retirement Swedish Social Insurance Inspectorate Stockholm 2014 Inspektionen för socialförsäkringen Authors: Marcela Cohen Birman, Christian Andersson 1

2 Summary The Swedish Social Insurance Inspectorate (Inspektionen för socialförsäkringen, ISF) is an independent supervisory agency for the Swedish social insurance system. The objectives of the agency are to strengthen compliance with legislation and other statutes, and to improve the efficiency of the social insurance system through system supervision and efficiency analysis and evaluation. The ISF s work is mainly conducted on a project basis and is commissioned by the Government or initiated autonomously by the agency. This report has been initiated by the agency. Background Early exit from the labor market has a major impact on individuals lives. It can affect their economic as well as social situations for the rest of their lives. Exit from the labor force can be influenced by different circumstances and the exit can take place more or less voluntarily. However, the inflow into old age retirement in Sweden has historically been through different pathways such as sickness and disability insurance, unemployment insurance and supplementary pensions. Since 2003, the existing regulations on sickness and disability insurance have gradually become stricter. In addition, new eligibility rules were introduced in July 2008, making it harder for individuals to stay on a benefit or to become a new beneficiary under the sickness and disability insurance systems. Since these reforms were introduced, the number of new disability beneficiaries has decreased substantially. At the same time, there has been a significant increase in the number of people retiring on the public old age pension before the age of 65. This increase can also be seen for those that continue working past 65. 2

3 Objectives The objective of this study is to analyze changes in exit from the labor market for individuals aged 60 to 64 during the period To analyze individuals pathways from the labor market, this study focuses on the main source of income for individuals who have had a similar pattern of sick absence in the past. It is of particular interest to investigate whether there is a correlation between the decrease in the utilization of sickness and disability insurance and the increase in early old age retirement. Furthermore, the study also investigates whether changes in exit from the labor market differ depending on gender, level of education, sector and profession. Methods Individuals main sources of income are used to define and describe possible changes in early exit from the labor market for those aged The main source of income is defined by using the following eight income categories: labor income, public pension, occupational pension, disability benefit, sickness benefit, unemployment benefit, social assistance benefit and other income sources. The period studied is A multinomial logit model is used to estimate the relative risk of having one of the income types mentioned above. The reference category is the year 2003 and disability benefit as the main source of income. The variable of interest is the interaction between individuals with an extensive historical sickness absence and single years. That is, the added effect of having an extensive sickness absence is studied per year. The history of sick leave is used as a proxy for health problems that could lead to a reduction in work capacity. In this study, this is classified as having at least 240 days of sickness absence between 54 and 57 years of age. The analysis is based on micro-level register data during , taken from the integrated database for labor market research (LISA) and micro data for the analysis of social insurance (MiDAS). These data include detailed information on income and demographic background. 3

4 Findings and conclusions The main result of this study is that individuals aged 60 to 64 with an extensive history of sickness absence have an increased risk of being old age pensioners, unemployed and on sick leave during most of the studied period. This result is in comparison with 2003 and with the risk of being a beneficiary of disability insurance. Furthermore, by the end of the studied period, a higher proportion of 60 to 64-yearolds earn their main income from labor compared with This increase is even higher among those with an extensive history of sickness absence. Furthermore, the results show that these tendencies are more pronounced among low-income individuals. At the end of the studied period, this group has a particularly high risk of being old age pensioners in comparison with the risk of being beneficiaries of disability insurance. They also have a higher risk of being beneficiaries of sickness as well as unemployment insurance. In addition, they have a higher risk of earning their main income from labor compared with the risk of being a beneficiary of disability insurance. The results showing a higher relative risk of early exit from the labor market through public pension, sick leave or unemployment among individuals with an extensive history of sickness absence are hence contrasted by the increasing proportion of individuals with their main income from labor. The changes in early exit among year-olds could be partially explained by the tighter regulations on sickness and disability insurance and stricter eligibility criteria for these schemes. Furthermore, stronger economic incentives for work during the studied period could be a contributing factor to the increasing proportion of individuals aged that earn their main income from labor. The Swedish government introduced an earned income tax credit in 2007, which aimed to increase economic incentives towards work. A higher earned income tax credit and reduced employer social contributions were also introduced for individuals 4

5 older than 65 years. From an economic point of view, it is positive for both individuals and society if more 60 to 64-year-olds earn their main income from labor. Continued participation in the workforce may also have an important social function. How and when individuals exit the labor market affect their social and economic situations both in the short and in the long run. In particular, it is of great concern if low-income earners exit the labor force early through public pension to a greater extent than other groups. If they do so, there is a risk that they will face lifelong low incomes. Finally, the study finds a correlation between the stricter rules on health insurance systems and early exit through public pension (and other pathways). While this could be problematic for the individual, it may also affect the legitimacy of the social security system if certain individuals feel compelled to retire earlier from the labor market. Contact Marcela.cohen-birman@inspsf.se or registrator@inspsf.se 5