Nout Wellink: The labour market in 2040 - greyer but full of vitality
Speech by Dr Nout Wellink, President of the Netherlands Bank and Chairman of the Basel
Committee on Banking Supervision, at the symposium "Demographic ageing: a broader
view", Science center NEMO, Amsterdam, 11 October 2007.
* * *
Imagine: it is the year 2040. Those who turn 32 this year will then be 65 and so are now
halfway there. Demographic ageing will have reached its pinnacle in 2040. More than 4 million
Dutch people will then be older than 65, working out at a quarter of the population, whereas
that age group now makes up less than 15%. For every person over-65, there will be just two
compatriots aged between 20 and 651.
In such a greying society, our cities and towns will look quite different to now. Amsterdam city
centre is likely to be a largely pedestrian zone, allowing for wider footpaths. Political pressure
will have forced the monument conservation authority to relax its rules. Large groups of older
people in the city will have been obliged to remove thresholds, install stair lifts and knock
through walls. The two universities in the capital will have been forced to merge because of
the smaller inflow of new students. Only a handful of the many places of entertainment
around Rembrant Square will still remain, but the classical performances at the
Concertgebouw and the Muziektheater aan 't IJ will be sold out every night. Subsidies for
museums may even have been scrapped owing to the overwhelming increase in visitor
numbers. And here, in NEMO, where today's children make their first discoveries in the area
of science and technology, there may be a shopping mall with stores full of books, golfing
equipment, spectacles, hobby accessories, fine chocolates and garden tools.
Of course this is mere speculation. Time will tell what life will really be like in 2040. But it's a
sure thing that the older people of the future will have a major influence. Today we are
looking at the economic consequences of population ageing. I want to talk to you about the
impact of ageing on the labour market and how we can prepare ourselves for it.
Labour force in 2040
For a start, the average worker in 2040 will be older than at present and so have more work
experience. Owing to the rise in the number of pensioners, he will have fewer competitors in
the labour market, unless there is a spectacular rise in birth or immigration rates. Because
work will become scarcer, but also because of the trend rise in labour productivity, his
disposable income is likely to be far higher than it is now.
But population ageing will absorb a huge share of the employees' rise in income if the current
schemes continue unchanged. To illustrate, if we assume that income in 2040 has risen by
60% [at, say, 1.4% per year], more than a quarter of this rise in income will be "eaten-up" by
higher contributions and taxes for the state old age pension2.
Some sectors will be faced by bigger changes in the labour market than others. At present,
older workers are overrepresented in education and health care. Shortages could arise in
these sectors if there is no increase in the inflow of young employees. In education, this is
already expected to lead to problems in the short term3. In the longer run, the effects will be
mitigated by the decline in the number of schoolgoing children. An added problem for health
care is that population ageing will generate greater demand. Working conditions in the health
care sector merit extra attention if we are to avert staff shortages in the future.
Retirement age
Looking at the labour market in 2040, we cannot skirt problematic pension issues. The
number of pensioners will increase, because the group of people reaching retirement age is
expanding while life expectancy has risen too. The latter is a great achievement, of course.
In 1960, 40-year-old men had an average life expectancy of more than 74 years, compared
to just above 78 in 2008. The life expectancy for 40-year-old women has risen by five years,
to something over 82. And there has also been a significant gain in the number of years lived
without the need for intensive health care4.
The price we pay for this progress is that bottlenecks may arise in the funding of the state old
age pensions and supplementary pension schemes. We can of course absorb these by
either raising contributions, or by letting benefits fall behind them. But such measures hit
people directly in their pockets, and I think that better solutions are available to improve the
sustainability of the pension system. One of these is to widen the contribution base through
greater labour participation. There is still scope for widening participation in the Netherlands,
notably among women, youths from ethnic minorities, people with occupational disabilities
and, most definitely, among older workers themselves. Population ageing apart, higher
participation is a good thing in itself. Our prosperity will benefit from the optimum deployment
of available workers. Moreover, older people are staying active for longer, thanks to the
higher life expectancy and good health care. They look after their grandchildren, perform
voluntary work and play a full part in society. An obvious path is to stimulate older people to
use their active attitude to life to stay on longer in the workplace. This would also reinforce
the solidarity between working and non-working people.
But let's not go too far. Employees in sectors such as construction, the fire brigade and the
army have often started working at a very young age. It would not be reasonable to expect
these groups to work for more than 50 years of their lives, whereas people in less demanding
positions are hard pressed to work for 40 years. Especially as these jobs are physically
taxing. The collective labour agreements for such physically-taxing occupations generally
arrange for pension funding that enables employees to stop work before reaching the
statutory retirement age. That is understandable, and may continue on broadly the same
lines as far as I am concerned.
It is difficult to exactly determine what percentage of the labour force hold physically-taxing
jobs, but in all likelihood, it would be reasonable and possible for the greater part of the
labour force to prolong their careers. An additional factor is the structural decline in the share
of physically-taxing jobs owing to the diminishing share of industry in our economy. This
employment shift to services set in many years ago, but is still ongoing. In 1980, industry still
accounted for 15% of employment, but this share has now dwindled to less than 10%5. The
share of construction in our economy remained stable over this period at around 5.5%.
Will staying on in the workplace alleviate the impact of ageing on the labour market? Yes,
most definitely! For employers, it means that labour supply will not decrease as rapidly,
making it easier for them to fill vacancies. And the bigger the working section of the
population, the better the labour market for both employers and employees because of the
lighter marginal tax burden. If more people continue working, not just until they turn 65 but
afterwards too, and delay drawing the state old age pension, there would be less state old
age pension claimants and more potential contributors. The level of contribution for the
working part of the population would then be lower. So it works both ways. Older people
themselves benefit from prolonging their working lives as a means of safeguarding the
sustainability of the pension system. For they enjoy higher disposable income.
Retaining older workers
The reality is that labour participation among those aged between 55 and 64 is relatively
low6. And participation among the over-65s is negligible, the reason being the various legal
and socio-cultural impediments discouraging older people from working for longer than they
generally do now.
A major obstacle is that many collective labour agreements provide for termination of
employment on reaching 65. It is subsequently quite unappealing - for both employer and
employee - to enter into a new contract. Having reached retirement age, the employee has
much less financial incentive to work, because he is then entitled to a state old age pension
as well as his supplementary pension benefits. For the employer, entering into an
employment contract with someone over 65 represents a risk, seeing as he is obliged to offer
all his employees occupational disability insurance. The employer may choose to place this
risk with the Employee Insurance Administration Agency or to run it himself, possibly by
taking out private insurance. If cheaper in their case, employers generally choose the latter
option. This choice applies for their entire payroll. But a problem is that insurers do not
provide occupational disability insurance for employees over 65. So it is up to employers to
carry the risk of occupational disability for these employees. Moreover, the risk of an
employee becoming sick increases as he gets older. Since the Sickness Benefits Act obliges
employers to continue paying sick employees for two years, this could be very costly for
employers.
The statutory retirement age thus constitutes an obstacle for older workers and their
employers, even though prolonging working lives would be of general benefit. Germany has
opted for gradually raising the retirement age from 65 to 67 as of 2012. During the first twelve
years, Germany will raise the retirement age by one month a year, and in the six following
years by two months a year, completing the process by 2030. So German employees will
have the opportunity to prepare for a later retirement age, and no one will have to carry on
working unexpectedly. We could likewise raise the retirement age in the Netherlands
stepby-step to, say, 67 too. This would make it easier and more rewarding to stay on in the
workplace.
But it is vital to encourage older workers to continue working, even before the retirement age
of 65. Because too many people are now taking early retirement without being prompted by
the physically-taxing nature of their job. With this in mind, the government has already voiced
its desire to partly fund the state old age pension by taxing older people's incomes. In itself,
the idea of funding state pensions from public resources seems a good idea: older people
would then help carry the collective burden of population ageing. All other things being equal,
it would allow for a reduction in general tax rates, and it is also expected to boost total labour
participation. Moreover, the funding of state pensions from public resources forms a direct
incentive to older workers to keep working. However, the impact of this inducement will be
contained, because the change in funding will mainly affect the more well-off pensioners.
Research by De Nederlandsche Bank7 has shown that when it comes to choosing their own
retirement date, this group is less sensitive to changes in their pension wealth. Besides the
said income effect, the move to finance state pensions from public resources also has a
substitution effect: the positive effect that continuing to work would have on the level of a
pension would be less if this pension were subject to tax. However, our research shows that,
on balance, funding state pensions from public resources would stimulate older workers to
stay on.
In addition to funding state pensions from public resources, there are conceivable measures
to reward older workers for continuing to work. In part, the current system already contains
such features. Owing to the fixed accrual of pensions, the years leading up to the age of 65
are relatively lucrative. And the earned income tax credit is higher for employees over 57.
Nonetheless, this now gives older workers who prolong their careers no more than EUR 500
a year. One possibility would be an incentive in the form of a considerable hike in this earned
income tax credit.
Helping older people find work
Besides older people who are already employed, there are of course those who have lost
their job through, say, a reorganisation. Many of them would like to keep working but find it
difficult to find a new job. In this respect, we need to look at older workers' salary and
productivity. Older workers are often more expensive than their younger colleagues, because
their salary has increased over the years. However, their expertise is often less up-to-date.
In part, the wider experience of older workers makes up for their perhaps outdated expertise.
However, this experience often proves to be most useful for the organisation in which it was
acquired. It is also difficult for employers to assess the precise nature of experience gained in
other enterprises. To what extent do the tasks and corporate culture resemble those in their
own company? How much responsibility did the job applicant actually hold? How well did he
perform? All too often there is no satisfactory response to such questions, prompting
employers to choose the safer option of a younger, cheaper candidate.
[This means that older job seekers have often been job hunting for some time when they file
job applications. Existing prejudices about older people, generous severance payments and
overestimation of their own employability make it harder to find work. The longer older people
seek work, the worse their labour market position becomes.]
To enable older workers to actually stay in the workplace, it is hence not enough to gradually
raise retirement age and increase financial incentives. Employers and employees will need to
make a joint effort. Employees will need to continue developing their skills to strengthen their
labour market position. And employers will have to be prepared to give older workers a
chance. For it is in their own interest to quickly fill vacancies and to take on good employees.
Importantly, employers should realise that older workers are indeed able to acquire new
knowledge and skills. And that they can win commitment from a motivated employee who
they are likely to retain in service for longer than a job-hopping employee in their twenties or
thirties.