The Budgetary Dilemmas of an Ageing Workforce: A Scenario Study of the Public Sector in the Netherlands

Transcription

1 European Journal of Population 14: 39 59, c 1998 Kluwer Academic Publishers. Printed in the Netherlands. The Budgetary Dilemmas of an Ageing Workforce: A Scenario Study of the Public Sector in the Netherlands EVERT VAN IMHOFF and KÈNE HENKENS Netherlands Interdisciplinary Demographic Institute (NIDI), P.O. Box 11650, 2502 AR The Hague, The Netherlands (Telephone: (+31) ; Fax: (+31) ; IMHOFF@NIDI.NL) Received 24 February 1997; accepted in final form 25 November 1997 van Imhoff, E. and K. Henkens, 1998, The Budgetary Dilemmas of an Ageing Workforce: A Scenario Study of the Public Vector in the Netherlands. European Journal of Population 14: Abstract. This paper studies the consequences (particularly the budgetary effects) of alternative senior-worker policies in the Dutch public sector. Special attention is paid to: the ongoing process of population ageing; the interaction between the participation in senior-worker schemes and the use of disability and unemployment schemes; and the effect of labour participation of older workers on employment opportunities for younger workers. From the scenario analysis, it appears that policies aimed at influencing the participation in senior-worker schemes will not result in substantial savings. The main conclusion of the study is that ageing of the labour force will lead to substantial cost increases anyway, whatever the early-retirement policy. van Imhoff, E. and Henkens, K., 1998, Les dilemmes budgétaires d une population active vieillissante: une étude par scénarios du secteur public en Hollande. Revue Européenne de Démographie 14: Résumé. Cet article étudie les conséquences (en particulier les effets budgétaires) de politiques alternatives sur les actifs âgés dans le secteur public hollandais. Une attention spéciale est portée au processus actuel de vieillissement de la population, à l interaction entre la participation au monde du travail de personnes âgées et le passage à l invalidité ou au non-emloi, et enfin à l effet de cette participation de travailleurs âgés sur les offres d emploi pour de plus jeunes travailleurs. De l analyse par scénarios, il résulte que les politiques, dont le but est d influencer la participation de personnes âgées au travail, ne conduiront pas à des économies substantielles. La principale conclusion de l étude est que le vieillissement de la population active conduira à des accroissement substantiels de coûts, quelle que soit la politique suivie en vue d une retraite à âge moins élevé. 1. Introduction Although the official retirement age in the Netherlands, as in many other developed countries, is 65 years, not many workers reach retirement 1 age still working. Older workers, either voluntarily or involuntarily, typically leave the labour force well before the official retirement age. In the age category only 19% of the men

2 40 EVERT VAN IMHOFF AND KÈNE HENKENS and 5% of the women are currently participating in the labour force, internationally a very low percentage (Kohli, 1992). Since the costs of large numbers of people exiting the labour market put high pressure on public expenditure, western countries are seeking to revise exit policies. The policy preference is to encourage retention and to involve employers in the development of a policy framework that distributes the responsibility and costs of supporting an ageing workforce. However, the legacy of policies promoting early retirement in western Europe is proving hard to reverse (Whitting et al., 1995). A policy aimed at reintegration of older workers in the labour force is absent in the Netherlands. Instead better benefits are provided to the ageing jobless. Guillemard and Van Gunsteren (1991) conclude that this policy is typical, not only for the Netherlands, but also for Sweden, Germany, France and the United Kingdom. Making it easier for older workers to receive compensation also makes it easier for companies to dismiss those who benefit from such better coverage, thus reinforcing age discrimination in the labour market. Re-entry occurs to some degree in the United States (Burkhauser and Quinn, 1989), but hardly at all in France, the United Kingdom, the Netherlands and Germany. In the Netherlands, low participation is caused by three types of outflow: early retirement, disability, and unemployment (De Vroome and Blomsma, 1991; Henkens and Siegers, 1991). These three types of outflow are not independent: restrictions in one result in an increase in another. Of the total number of persons disabled for work, a large number can be considered as concealed unemployment. An analysis of the working capacity of thoseleaving via a disablement scheme leads to the conclusion that the unemployment component in the disablement scheme can be estimated somewhere between one third and one half (Aarts and De Jong, 1990). Similarly, the stabilization in the number of persons disabled for work during the last decade is mainly ascribed to the opportunity to leave work via voluntary early retirement (De Kemp, 1992). During the 1980s, early retirement schemes became the most important exit route for older workers. Since 1976, individual private sector companies started to introduce a new age-specific exit pathway for older workers (De Vroome and Blomsma, 1991). These early retirement schemes were originally suggested by trade unions and contained both a social and an employment purpose. Early retirement schemes offered older workers a financially sounder and socially more acceptable way out of labour than through disability or unemployment, and the exit of older workers had positive effects on youth employment. In most early retirement schemes employees need to have worked at least ten years in the sector and have to be at least 60 years of age before being entitled to a early retirement benefit. Financial conditions at early retirement are very favourable. The gross replacement rate in terms of final pay is in the percent range. For 90% of the schemes, this results in net early retirementbenefitsof atleast85% ofthe last wage (De Vroome and Blomsma, 1991; OECD, 1995). This is much higher than in, for example, the United States (Grad, 1990). The public sector has one single early

3 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 41 retirement scheme for all its organizations; it covers more than 850,000 employees or about 15% of the active Dutch labour force. In its objective to increase the labour force participation of the elderly, and to reduce public expenditure, the Dutch government recently restricted the use of the disability and unemployment pathway to lay off older workers. Moreover, it has announced that, during the current cabinet term, drastic savings will have to be realized on early retirement and other fringe benefits in the public sector. The intended cutbacks rise to 1.2 billion guilders in The main target for these cost reductions is the early retirement scheme for public sector employees. The main motivation to concentrate on early retirement is the rapid increase in the costs of the early retirement scheme (ERS) in recent years. Because of the ongoing process of ageing of the labour force, a business-as-usual policy will result in increasingly higher costs of ERS and similar senior worker arrangements during the next few decades. A cutback on or modification in the ERS and other senior worker schemes can take many different forms. Each form has its own distributionary effects, volume effects, and budgetary effects. In addition, each system of senior worker schemes has its own sensitivity to the process of ageing of the labour force. Firstly, as already stated above, restricting ERS outflow will lead to an increased outflow to alternative inactivity schemes like disability. Secondly, a reduced outflow into the ERS will lead to workers staying longer in the labour force, with direct consequences for salary costs. Thirdly, for younger persons it will become more difficult to find a job in the public sector, resulting in higher unemployment. In this paper, we will present the results of a comprehensive analysis of the consequences, in particular the budgetary consequences of alternative systems of senior worker schemes in the Dutch public sector (to be defined in the next section). In assessing the total budgetary consequences of alternative policy measures, we take into account the salary costs of the active (working) population, the benefit costs of the inactive (below 65 years of age), and the implicit costs of not hiring younger workers to replace the retiring older workers. 2. Data In the Netherlands, participation in a pension fund is compulsory for almost all employees. Typically, these pension funds are organized per economic sector, although some large companies have their own pension fund. By far the largest pension fund is the ABP ( Algemeen Burgerlijk Pensioenfonds or General Civil Pension Fund ). Indeed, the ABP is one of the largest pension funds in the world. The ABP insures all civil servants as well as educational workers. For the purpose of this paper, we define public sector as all sectors covered by the ABP. This roughly corresponds to all non-commercial services, excluding health care. Everyone in the Netherlands aged 65 and over receives a public old-age pension ( AOW ) directly from the state. The level of this public pension is fixed: it

4 42 EVERT VAN IMHOFF AND KÈNE HENKENS is related to the legal minimum wage, and independent of work history and past earnings. Pension funds like the ABP offer a supplementary old-age pension, which is dependent on work history and past wages. Premiums are paid by employers and employees alike. In some cases, formerly active persons (e.g. an unemployed teacher) continues to accumulate pension rights (and to pay premiums), even though the employer is now a social security agency. In the case of the public sector, this social security agency frequently is the ABP itself. For example, a 62-year-old former civil servant on early retirement, receives his early retirement benefit from the ABP, simultaneously paying the ABP premium for the supplementary old-age pension. From the previous paragraph, it should be clear that the ABP has a tremendous amount of information on all current and former public sector employees. For the purpose of this paper, we have received ABP count and average salary data by age, sex, current and previous activity status over the calendar year Modelling the dynamics of an ageing workforce The first, and most important step in evaluating the consequences of alternative senior worker policies, is to construct a flow-model for the public sector workforce. Such a model is capable of capturing the most important volume effects of changes in the ERS. For example, reducing the access to the ERS is equivalent to lowering the age-specific outflow rate of moving from employed to early retired. As a result, the workforce will grow older, more elderly workers will be exposed to the risk of flowing into alternative inactivity schemes (like disability), and fewer job openings will become available to younger persons. With a so-called multidimensional demographic projection model (Van Imhoff and Keilman, 1991), it is possible to make alternative projections of the population of public sector employees by age, sex, and labour market status (both the active and the inactive). Employees are classified by age (up to 65), sex, and position (active, unemployed, early retirement, and so on). Rates for inflow, outflow, and position changes have been estimated from ABP data over the year 1993, and hypotheses on future changes in these rates have been formulated, reflecting alternative senior worker policies. For each flow, the age-specific rates are remarkably stable over time, which justifies the assumption of constant rates for a benchmark scenario. As an illustration, Figures 1 4 show some selected age-patterns. The age composition of the inflow (Figure 1) is concentrated around age 25. For females, the peak occurs about 2 years earlier than for males. In addition, the effect of re-entry of women after child-bearing is clearly reflected in the inflow pattern. Figure 2 shows the age-specific rates for the flow from active to unemployed. The high rates at younger ages reflect the termination of temporary contracts; the high rates at older ages (between 55 and 60) indicate the attractiveness of the unemploment scheme for workers and employers alike. Figure 3 shows the age-

5 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 43 Figure 1. Age distribution of inflow of new workers (public sector, 1993). Source: Based on ABP pension fund data. Figure 2. Age-specific rates for flow from active to unemployed (public sector, 1993). Source: Based on ABP pension fund data.

6 44 EVERT VAN IMHOFF AND KÈNE HENKENS Figure 3. Age-specific rates for flow from active to disability (public sector, 1993). Source: Based on ABP pension fund data. Figure 4. Age-specific rates for flow from unemployed to disability (public sector, 1993). Source: Based on ABP pension fund data.

7 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 45 specific disability rates (flow from active to disabled). For females, disability rates are higher than for males at all ages. The curve starts to fall from age 58 onward, which can be explained by the approach of the early retirement age. Finally, Figure 4 shows the disability rates for the unemployed. The unemployment scheme is such that the maximum duration of the unemployment benefit increases with age. This feature is reflected in Figure 4: until age 50, disability rates for the unemployment are higher than for the active workers; 2 however, for those persons who become unemployed after age 50, there is no incentive to apply for a disability benefit, since the unemployment benefit runs until the pension age of 65. The second step involves, on the basis of the projection results, an assessment of the budgetary consequences. In doing so, use has been made of the ABP data on the age-salary profile of the active workers and the replacement rates (i.e. the benefit as a percentage of the last earned salary) of the inactive workers. 4. General considerations In formulating scenarios for alternative senior worker systems, the following four questions are particularly relevant: What does ageing imply for labour productivity and the demand for new personnel? How should the effect redistribution of labour be evaluated? What would be the effect of changes in ERS-like schemes on the use of other inactivity arrangements? What would be the effect of part-time retirement on the use of inactivity schemes? Each of these for issues will be elaborated below. THE RELATIONSHIP BETWEEN AGE, PRODUCTIVITY, AND REMUNERATION The relationship between age and productivity is largely unknown. Research for the Netherlands (Van Heeringen, 1983) as well as for the US (Jablonski et al., 1988) suggests that, to the extent that capabilities diminish with age, this will especially apply to physical capabilities. For most jobs, labour productivity will deteriorate to a limited extent only and will anyway be highly job-dependent (McEvoy and Cascio, 1989). For this reason we start from the assumption that labour productivity per hour worked is in principle the same for older and younger workers. However, labour productivity also depends on the number of hours worked. Here, age-dependent leave and especially absenteeism are relevant. This leads to an age-productivity profile that very slightly declines with age. The age-salary profile is quite steep (see Figure 5). Between age 25 and 50, the salary doubles for males; for females, the increase is somewhat smaller.

8 46 EVERT VAN IMHOFF AND KÈNE HENKENS Figure 5. Average salary costs per fulltime equivalent (public sector, 1993). Source: Based on ABP pension fund data. One could think of several reasons why salary increases so much more strongly with age than productivity does. In our view, the explanation in terms of implicit contract theory is the most important, and certainly the most appealing (Lazear, 1981, 1984). In the Dutch public sector, salary scales with automatic annual increments are universal. The commitment between employer and employee is enhanced by the prospect of an increasing age-income profile. When young, the employee accepts a relatively low wage, in exchange for the promise that he will receive compensation at higher ages in the form of a relatively high wage. Of course, with an ageing worker population, the costs of these implicit contracts become increasingly higher. In all scenarios it is assumed that the age-salary profile remains constant. We will return to this assumption in the concluding section. REDISTRIBUTION OF LABOUR The extent of labour participation by elderly influences the number of jobs available for younger persons. Despite a growth in job opportunities during the second half of the 1980s and again in , the unemployment in the Netherlands is unabatedly high. To what extent this item employment for youngsters should be taken into account is not evident. Not all persons seeking for a job are on social security. In addition, a person who has become unemployed (or not become

9 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 47 employed) because of declining job opportunities in one sector might find work elsewhere. However, to the extent that there will be compensating displacement of workers ( crowding-out ), total unemployment will not be affected by finding work. Since the reduction of unemployment continues to be one of the main priorities of government policy and can be expected to remain to be so in the future, the effect redistribution of labour has been included in the calculations, albeit at a conservative price: each non-hired younger person costs an average 15,000 guilders per year, which amounts to roughly 50% of the minimum social welfare level for a couple. This procedure implies either perfect crowding-out at 15,000 guilders per year, or 50% crowding-out at 30,000 per year, or any equivalent combination of these two. The details of this calculation are open for discussion. However, in our view it is essential that, when evaluating alternative senior worker policies, the effect on unemployment is also taken into consideration. Indeed, one of the main reasons for introducing early retirement schemes by the end of the 1970s in the first place, was to combat that same unemployment. Similar arguments can be heard today: the recent attempts to lower the retirement age in countries like France and Spain illustrate that high unemployment puts pressure on governments to extend retirement opportunities for older workers. We feel that our price for an unemployed youngster is extremely modest. EARLY RETIREMENT, DISABILITY, UNEMPLOYMENT: SUBSTITUTE PATHWAYS? The question how many workers will use alternative inactivity channels to leave the labour force if the option of early retirement is closed, can only be answered in an indirect way. During the 1980s, in which the ERS became tremendously popular, the disability incidence rates for elderly workers (55 years and older) strongly declined, while the disability incidence rates for younger workers continued to follow the trend of increasing over time. By comparing the age-disability incidence profiles for the 1970s (without ERS) and the 1980s (with ERS), Ekamper and Henkens (1993) conclude that if there had been no ERS, the number of disabled workers would have been much larger than they actually are. Similarly, if the ERS is to disappear, there is every reason to expect that disability incidence rates for older workers will rise sharply, and will return to age-disability incidence profiles that were observed during the 1970s. This assumption is supported by recent research among Dutch state employees, from which it appears that especially the less healthy workers make use of the ERS (Henkens and Tazelaar, 1994). In the Netherlands, the disability scheme has recently been reformed, leading to a reduced flow into disability: the disability incidence rates fell by roughly 50% for public sector workers. At the same time, the flow of older workers into unemployment increased. 3 Thus, it is quite conceivable that abolition of the ERS will lead to an additional use of the unemployment scheme. However, to be on the

10 48 EVERT VAN IMHOFF AND KÈNE HENKENS safe side, in the scenarios we nevertheless assume that unemployment rates will not increase if the ERS disappears. Of course, there is plenty scope for disagreement on the details of this kind of assumptions. However, it should be kept in mind that, as will be shown later in this paper, each change of assumption leads to numerous compensatory effects, particularly if the effect on redistribution of labour is also taken into account. PART-TIME RETIREMENT In view of the experience with part-time retirement in Sweden, part-time retirement is generally seen as an instrument to reduce the outflow to disability (OECD, 1995). The argument then is that part-time retirement reduces the risk of overburdening senior workers. However, the impact of the introduction of part-time retirement on disability incidence is surrounded by uncertainties. In response to several policy measures, disability incidence rates decreased spectacularly in recent years. Therefore, the scope for even further reductions may be quite limited. Moreover, from an evaluation of the recently introduced part-time retirement scheme for state employees (Ter Huurne, 1995), it appears that a reduction of the working time of elderly workers never resulted in less work stress for the department in question. Motives to participate in the part-time retirement scheme are only to a very limited extent related to health issues and work performance. The potential effects of the introduction of part-time retirement schemes on the outflow to unemployment are dependent on the attitude of the employer, rather than of the employee. As in most European countries, Bolweg and Dijkstra (1993) conclude for the Netherlands that the emphasis is on schemes that stimulate a maximum outflow of elderly workers, which causes the schemes to function as substitutes: a reduction in one type of outflow is offset by a compensatory increase in another type of outflow, and vice versa. This conclusion holds also for the public sector, despite government policy to the contrary. Still, we will assume that the introduction of part-time retirement will lead to less outflow into unemployment. 5. Retirement scenarios Six scenarios will be discussed in this paper. All scenarios start on 1 January 1994 and continue until the year In comparing scenarios, we will concentrate on the year 2010, i.e. the last year in which the first post-war baby boom generation is still potentially active. For all scenarios, the total number of active working hours remains constant throughout: work time that is released through absenteeism, inactivity, or part-time retirement, is fully transformed into new jobs (we will return to this issue in the concluding section). A summary of the scenario assumptions is given in Table 1.

11 Table 1. Overview of scenarios Scenario Unemployment Disability Absenteeism ERS-like scheme Benchmark (Status quo) ERS as in 1993 No ERS 1993 High Const from 55 None Part-time Max 4% High Const from at age 52, 0.90 at age 56, 50% participation Part-time plus Max 2% Medium Const from 50 Idem, 100% participation Grey None None Const from 45 None Green Age 58, 65% benefit, 100% participation THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 49

12 50 EVERT VAN IMHOFF AND KÈNE HENKENS BENCHMARK As the reference (or benchmark) scenario we use status quo assumptions: in this scenario, all schemes remain as they are now. The current fulltime ERS is maintained: at age 61, most workers can/want to fully retire, at a benefit that is 75% (gross) of the last earned salary. Elderly workers leaving the active status are replaced by younger workers, distributed by age and sex as in NO ERS In the No ERS scenario, the current fulltime early retirement scheme is totally and immediately abolished, without an alternative senior worker scheme taking its place. Because of the substitute pathways mechanism, this will lead to increasing pressure on unemployment and disability schemes. The disability incidence rates will increase for the higher ages. Since the ERS is no longer available as an instrument for handling discrepancies between work pressure and carrying capacity, disability and absenteeism will take over. For the same reason, the illness absenteeism proportions are kept constant from age 55 onwards at a relatively high level. The unemployment rates, however, are maintained at their initial, already high 1993 levels (no improper use of the unemployment scheme). PART-TIME RETIREMENT An alternative to No ERS could be to replace the current fulltime ERS by a system of part-time retirement. In our part-time scenarios, it is possible from the age of 52 to work 0.9, against 95% of the gross salary; and from age 56 to work 0.8, against 90% of the gross salary. Thus, part-time retiring workers forego 50% of their salary over their non-worked working time. Two part-time scenarios have been formulated. In the first, we assume that up to 50% of all workers participate in the scheme, with absenteeism and unemployment rates that are somewhat lower than in the No ERS scenario. In the second, the part-time retirement scheme is combined with a general change of attitude in favour of age-conscious manpower policy, which translates into significantly lower unemployment and disability incidence, and 100% participation in the parttime retirement scheme. EXTREME SCENARIOS GREEN AND GREY In order to illustrate the dominant role of population ageing, we also constructed two very extreme, non-realistic scenarios. In the scenario Grey, all untimely (i.e. occurring below age 65) outflow of elderly workers is removed. Also, absenteeism at higher ages is strongly reduced. In the scenario Green, the current full-time early retirement scheme is not abolished but, quite the opposite, significantly extended.

13 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 51 Figure 6. Worker population at 1 January 1994 (public sector). The ERS elegibility age is lowered from 61 to 58 years, with 100% participation, against 65% (gross) of the last earned salary. 6. Results BENCHMARK In response to the process of gradual ageing of the labour force, the composition of the working population changes quite drastically over the next 15 years. Figures 6 and 7 show this composition by age, sex, and status per 1 January of the years 1994 and 2010, respectively. The ageing is unmistakable: the proportion aged 50+ among the active workers increases from 17.4% in 1994 to 31.3% in This has the following consequences: 1. The outflow to inactivity schemes increases. Around 2010, the annual outflow into unemployment, disability, and ERS reaches its maximum. The development over time differs between specific inactivity schemes, because next to the age structure of the active population the development in inactivity rates also plays a role. 2. Unemployment: in 1999, unemployment will have overtaken disability as the most important inactivity scheme for older workers. Between 1994 and 2010,

14 52 EVERT VAN IMHOFF AND KÈNE HENKENS Figure 7. Worker population at 1 January 2010, Benchmark scenario (public sector). the number of unemployed public sector workers increases from 50 thousand to 86 thousand. 3. Disability: in 1993, the disability incidence rates fell. Up to 2000 this implies a decrease in the number of disabled public sector workers, from 67 thousand in 1994 to 62 thousand in From 2000 onward, the ageing of the active population gains the upper hand; the number of disabled persons will increase again, to 69 thousand in ERS: as the result of recent modifications in the early retirement scheme, the rates for entry into the ERS are lower from 1993 onward than they were before. Until 1999 this implies a decrease in the number of persons on ERS benefit, from 40 thousand in 1994 to 33 thousand in However, after 1999 the number of ERS retirees start to increase very fast, to 60 thousand in The average number of hours worked declines, as a result of absenteeism increasing with age. Since the total number of hours worked is constant, the number of jobs (measured in fulltime equivalents) slightly increases. 6. The average salaries of the active increase until the year After that, the average salary slightly declines. Although the share of the elderly workers continues to increase after 2000, there are two compensatory, i.e. salary-depressing effects: the number of young entrants increases, and the share of female workers increases.

15 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 53. Table 2. Summary of results Scenario 1 bench ners part part+ grey green In million guilders Salaries Unemployment Disability ERS Sub-total Redistribution Total As percentage Proportion 50+ among the active workers 1 bench Benchmark ners No ERS part Part-time part+ Part-time plus attitude change grey Grey green Green 2 Relative to Benchmark The total costs for the public sector increase between 1994 and 2010 from 55.7 bn to 60.5 bn, an increase by 4.8 bn (see Table 2). By status, the cost increases are +1.4 bn (active), +1.8 bn (unemployment), +0.5 bn (disability), and +1.1 bn (ERS), respectively. NO ERS Immediate and total abolishment of the current fulltime early retirement scheme (scenario No ERS ) has, relative to Benchmark, the following effects: 1. Additional ageing leads to more outflow into unemployment. The costs of unemployment in 2010 increase by an additional 600 m. 2. Additional ageing and higher disability incidence rates lead to more outflow into disability. The costs of disability in 2010 increase by an additional 820 m. 3. No more ERS benefits. The direct costs of the ERS decrease in 2010 by m. 4. Less outflow of older workers results in more unemployment benefits for youngster. Over the full period , the total inflow of youngsters (new jobs) in the No ERS scenario is 42,500 less than in the Benchmark scenario.

16 54 EVERT VAN IMHOFF AND KÈNE HENKENS At our conservative price of 15,000 guilders per year, discussed in section 4 above, this leads in 2010 to an additional expenditure item of 640 m. 5. Less outflow of elderly workers leads to higher average salaries and higher average absenteeism. This leads to an additional increase in the salary costs of the active workers by 680 m in Against the m direct savings on the ERS, then, we have m compensatory cost increases elsewhere. The totale compensatory cost increases amount to 81% including redistribution of labour, 62% excluding redistribution of labour. Compared to Benchmark, abolition of the ERS will lead to a net saving of only 650 m in PART-TIME SCENARIOS Relative to the No ERS scenario, the introduction of a part-time retirement scheme has the following effects: 1. Less outflow into disability and unemployment leads to savings on the costs of inactivity schemes. 2. Less absenteeism leads to savings on the salary costs of the active workers. 3. Direct costs of the part-time retirement scheme arise, amounting to 50% of the salary costs for the non-worked working time. 4. The age structure of the active workers changes, but the direction of the change cannot be unambiguously predicted: less outflow of elderly leads to ageing, hiring new workers to replenish the released working time leads to rejuvenation. 5. Replenishment of the working time that is released by part-time retirement leads to more inflow of young workers and to less unemployment benefits to youngsters ( redistribution of labour ). For the separate effects, the differences between the two part-time scenarios are much larger than for the total effect. Including redistribution of labour, the net savings in 2010, relative to No ERS, amount to about 200 m for the ordinary part-time variant, and 500 m for the plus variant. These are quite small sums. The sizeable savings on unemployment benefits, both for older workers and youngsters, are for the major part undone by the increased salary costs of the active workers, a consequence of ageing, on the one hand, and the direct costs of the part-time retirement scheme, on the other hand. EXTREME SCENARIOS Compared to Benchmark, the scenario Grey in 2010 leads to savings on inactivity schemes to the amount of 10 billion guilders. Naturally, this scenario leads to an impressing ageing of the worker population. Of the total savings on inactivity schemes of 10 bn, about 2.8 billion is lost in higher salary costs and 4.8 billion in fewer jobs for younsters; on balance, the savings are only 2.3 billion. For such an extreme scenario, this sum is hardly worthwhile.

17 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 55 In the other extreme, equally non-realistic scenario Green, a drastic rejuvenation of the labour force occurs, compared to Benchmark. Against additional ERS expenditure amounting to m in 2010, we have a total of m compensatory savings elsewhere. On balance, this Green scenario leads to only 270 m additional expenditure in Discussion and conclusions Most western countries are confronted with an ageing workforce. Rising costs of labour market exit of older workers make countries inclined to alter their policies towards outflow opportunities. In this context, restricting early retirement opportunities is frequently emphasized. Our study of the Dutch public sector shows that whatever happens to exit policies, the substantial ageing will lead to a significant increase in costs. The proportion of elderly in the service of the public sector will strongly increase during the next few decades. In 1994, 17.1% of the active workers in the public sector was 50 years or older. In 2010 this percentage, depending on the actual senior worker policy, will be close to 35%. On the basis of the outcomes of the different scenarios, we conclude that policies aimed at reducing the participation in senior worker schemes and/or the use of inactivity schemes via restricting eligibility criteria, will not be able to generate substantial savings on public spending. The compensatory effects of retrenchments on the early retirement scheme amount to more than 60%, not including: substantial effects on unemployment among the non-elderly (in 2010 additional compensating expenditures to the order of 20%); possible additional ( improper ) use of unemployment schemes. Within the total public budget, which includes social security, each type of expenditure is reported as a seperate item, and may even resort under a different agency. The current political concern over the public cost of older workers relates to the cost of early retirement benefits. However, as we hope to have shown, the ERS budget item is only part of a more complex story. A cutback on the ERS may make the ERS agency happy, but for the public budget as a whole, a sizeable portion of the hot potato is simply passed on to other agencies, leaving total public spending largely unaffected. The underlying cause of the increasing costs of senior worker schemes should not be sought in the extent to which elderly workers participate in this kind of schemes. Although increasing the labour force participation of elderly, for instance through measures such as part-time retirement, can be considered as desirable for a variety of reasons, the budgetary benefits of such policies are limited. The key to the problem of the increasing costs is located in the combination of (1) the process of ageing of the labour force, (2) the fact that age-salary profiles are relatively steep, and (3) the relatively high benefit levels. If workers become older on average, they become more expensive on average. In the current situation,

18 56 EVERT VAN IMHOFF AND KÈNE HENKENS these cost increases express themselves especially in the early retirement scheme and unemployment schemes. In alternative systems, they will express themselves elsewhere, for example in disability, or in the salary costs of the active workers, or in the unemployment benefits to youngsters who cannot find a job because the older workers leave the labour force too slowly. Of course, the method used in this paper and the specific scenario assumptions can be debated, on various grounds. Below, we will briefly comment on the most obvious potential points of discussion. In the first place, all scenarios have assumed that the total production (number of hours worked) remains constant over time. In response to general productivity gains and/or effective reductions of the public sector, the demand for active personnel might decline. Obviously, this would modify the scenario outcomes. A decreasing demand for personnel would primarily manifest itself in a reduced inflow of new, young employees. Then, the ageing of the worker population will become even sharper than it already is under the current scenario assumptions. This holds true for all scenarios to a similar extent, so that the differences between the scenarios would remain of the same order of magnitude. In the second place, all calculations have been made in terms of gross salary and benefit costs. Part of these gross outlays come back to the treasury via taxation and social security contributions. Some rough calculations indicate that these fiscal effects tend to make the budgetary differences between the scenarios, which are already rather limited, even smaller rather than larger. However, the total increase in costs in response to workforce ageing becomes smaller after correction for fiscal effects. In the third place, each scenario embodies assumptions concerning the future rates of outflow to unemployment and disability. The exact specification of these assumptions is open to debate. However, the principle of the substitute budget items results in every modification being compensated to a very large extent by changes elsewhere in the system. Finally, in all scenarios, the (steep) age-salary profile has been assumed to remain constant. If the form of this profile is a pure age effect, the assumption is harmless. However, it might be the case that a salary increasing with age also reflects promotion to higher functions. Then, with a constant ratio of lower and higher functions, ageing of the workforce should lead to a decrease in the slope of the age-salary profile, since less elderly workers can be promoted to higher functions. In order to investigate this issue, we analysed the relation between age and the maximum of the current salary scale. Essentially, this procedure removes the effect of automatic annual wage increases (seniority premiums). The resulting profile is almost flat, which suggests that the steepness of the cross-sectional agesalary profile is almost completely due to a pure age effect. The extent to which the results of our study of the Dutch public sector also apply to other sectors or countries is particularly dependent on the relationship between age and the wage-productivity gap. Although this gap may be somewhat

19 THE BUDGETARY DILEMMAS OF AN AGEING WORKFORCE 57 less automatic in market sectors of the Dutch economy, most industrial sectors in the Netherlands are similarly characterized by a system of postponed payment: older workers have high salaries relative to their productivity (CPB, 1995). The magnitude of the budgetary effects of an ageing workforce may differ to a certain extent in different countries. For one thing, population ageing in the Netherlands is relatively rapid and activity rates of older persons are relatively low compared to other developed countries. Also, the importance of seniority criteria in the wage structure differ between countries (Frank and Hutchens, 1993). However, a positive relationship between age and earnings seems to be deeply entrenched in OECD countries. Whereas in the US, Japan, and to a lesser extent also in the UK income flattens out around the age and declines thereafter, in France earnings rise uninterruptedly with age (OECD, 1996). In principle, wage systems may adapt to changing demographic patterns: the increase in the relative supply of older workers may depress their earnings levels. However, as yet there are only very few signs of such flattening of age-earnings profiles (OECD, 1996). Thus, it appears reasonable to conclude that as long as salaries increase much more with age than does productivity, and as long as replacement rates are as high as they currently are, an ageing workforce involves society in high costs (Kotlikoff and Wise, 1989; Lee et al., 1988; Klevmarken, 1993). Acknowledgements The research on which this paper reports was undertaken in 1995, commissioned and sponsored by the Dutch Ministry of Education. We would like to thank Harry van Dalen and an anonymous referee for valuable comments on an earlier version of this paper. Notes 1 Throughout this paper, we use the term retirement to indicate qualification for a public old-age pension, i.e. reaching the official retirement age. 2 It is not immediately clear how this positive association between being unemployed and disability incidence should be interpreted. On the one hand, health problems could be the result of (long-term) unemployment. On the other hand, the unemployed could be a selective group, in the sense that people with health problems are at a higher risk of being dismissed, or at a higher risk of remaining in unemployment (Henkens et al., 1996). 3 It should be pointed out, though, that the Dutch disability scheme has always been exceptionally permissive, resulting in large numbers of disabled persons, including a sizeable portion of hidden unemployment. Under stricter disability regulations, the substitutability between disability and unemployment among older workers should be much reduced. For example, recent research findings for Germany suggest that disability and unemployment are not substitute pathways for older workers to leave the labour force before reaching the official retirement age (Riphahn, 1997). References Aarts, L. J. M. and De Jong, P. R., Economic Aspects of Disability Behavior. PhD dissertation, Erasmus University, Rotterdam.

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