Early Retirement Effecting Population

Usually, Europeans retire before they reach the age of 61, which is way below the legal retirement age in most countries. In the Finnish case, one would have to be 65 years old in order to retire, that changed in 2004[4], yet the actual retirement age dropped from 61.4 in 2001 to 60.3 in 2003. This development is partially due to the rising demands of working life and the big differences concerning the skills of not only younger members, but also older members of the Finnish labour force. Another reason is the misuse of early retirement to ease the effects of economic reform. The economic consequences are a loss of output, higher benefit payments and a lower tax base. An estimation implies that the costs related to early retirement in Finland will be nearly twice as high in 2010 compared to 1980.

Because of the background of the expected population ageing, the actual retirement age must be increased substantially or the danger of failing social security systems and potential labour will be in concern along with skill and knowledge shortages. To better the situation, the European Union set itself to double the rate of employment of older workers by 2010.[5] Yet, right now it seems doubtful that they will meet their goal. Also, it uncertain if an employment rate of 50 percent for older workers will be enough to turn from a collapse of the pension systems. This is the reason that the topic of population ageing is still on the agenda politically.

The difference between the economic urgency of working longer and the employees’ choice is due to poor policies during the 1980s and 1990s. As a reaction to the great rise of unemployment, many EU Member States introduced early retirement schemes to improve the labour market situation. In 2000, there were six schemes in Finland which allowed an early dismissal from work whether it is for disability, individual early retirement, and extension of unemployment benefits for people between 55 and 59 years, or early old-age pensions and part time pensions.

Even though for a long time the effects of early retirement were presented as a really good thing (because of the availability of jobs for younger people, more time for elder people to relax, and lower unemployment numbers for the government), they turned out to be a pricey myth. The employers used those schemes as a way to rid older workers at the expense of the public, while individual employees saw them as opportunity to retire at a comparatively early age without serious financial penalties. Throughout Europe, the use of the schemes decreased the retirement age. In addition, the schemes strengthened people’s belief that it is okay to retire early. This type of attitude jeopardizes the scheme and the idea of the ‘generation contract’ which is that people at the working age provide for those who are retired.[6]

Besides the direct financial burden caused by early retirement schemes, the hidden idea of older people in the labour market are not needed and are preventing young people from getting jobs may be even more devastating in the long-run. Since early retirement has been promoted for years, it is difficult to get new messages across like, due to demographic changes people need to work longer in life and older employees are a valuable asset for companies. It’s not surprising that many favour a retirement age noticeably below 65 years.

After the Finnish government realised the bad effects of the early retirement schemes and the rising problems connected to population ageing, a large retirement fund was decided in 2002 and came into force three years later in 2005. The official retirement age of 65 years was replaced by a more supple approach which allows people to retire at the age of 63 but at the same time it offers strong financial motives to keep working until the age of 68. Plus the modification reduced the possibilities for early retirement and increased the responsibilities of employers for older workers.[7]

The assumption can be made that the measures and changes related to the ‘largest [pension] reform ever’ (Finnish Centre for Pensions 2004: web document) have a decisive influence on the retirement age itself in Finland and the pension expenditure in the future. According to Janne Pelkonen and Eila Tuominen (2004: 5), the constricted rules for early retirement will lead to longer working careers of people ages 60 to 62 who would have retired before. But, it’s still unknown how many people will stay in work after the age of 63. The effectiveness of financial motivations for people who work until they are 68 will be determined by the labour market and the behaviour of elder people. A basic requirement is the availability of jobs and working environments where people feel comfortable and have interesting and challenging tasks. From society’s point of view there is a risk that the 2005 pension reform has a bad effect on the equality between people working in different divisions of the Finnish economy. It is likely, for example, that white-collar workers profit more from the reform than blue-collar workers. One good reason for this is the fact that from the 2005 pension and on, rights also accumulate from study periods, which favours people with a better education, although the compensation is relatively low. Also, blue-collar workers may not be able to work longer than the age of 60 or 63 because they have performed hard physical labour throughout their life.[8] White-collar workers, on the other hand, may enjoy their office jobs until they are 68 and benefit from the new financial bonuses (an increase in accrued pension rights). Another scenario is that due to retirement arrangements white-collar workers may have gained enough financial security by the age of 62 or 63 already, so that they have no economical need to continue working. This could lead to the paradox situation that white-collar workers who are in a good shape physically are retiring early, while blue-collar workers who would need a better pension are physically not able to stay longer in their jobs.

4] As part of the pension reform in 2005 the official retirement age was reduced from 65 to 63. Concurrently strong financial incentives were introduced to persuade people to work until the age of 68.

[5] The target is part of the so called Lisbon Process, which has the aim to turn the EU into, the ‘…most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion’ (European Council 2000: web document).

[6] In the Finnish case the ‘generation contract’ is defined as follows: the working age population is not directly financially responsible for their own parents, instead, there is a collective responsibility on behalf of the state and society with regard to elder people (Julkunen 2003: 390).

[7] In addition to the pension reform several programs with a focus on active ageing were started or continued: the National Program on Ageing Workers (1998-2002), the National Well-being at Work Program (2000-2003), the Workplace Development Program (1996-1999 and 2000-2003) and the National Productivity Program (1993-1995, 1996-1999 and 2000-2003) (see Piekkola 2004). As a result of these and other measures, Finland managed to increase the employment rate of elder people by 11.2 percentage points between 1995 and 2001, which is the best score among EU Member States (Committee of the Regions 2003: 22). Yet, it should be mentioned that due to the economic crisis at the beginning of the 1990s, Finland had a different starting point (see Table 3).

[8] According to a recent study by Kirsi Ahola, burnout problems are more common among blue-collar workers in Finland than in white-collar professions (see Helsinging Sanomat International Edition 2004c).