Older Workers: Policies of Other Nations to Increase Labor Force Participation
Published: 2003-02-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In recent years, the challenges of aging populations have become a topic of increasing concern to the developed nations. These challenges range from the fiscal imbalance in national pension systems caused by fewer workers having to provide benefits for greater numbers of retirees, to potential economic strains due to shortages of skilled workers. Part of the solution to these challenges could be greater older worker labor force participation. GAO identified three nations--Japan, Sweden, and the United Kingdom--that had displayed high levels of older worker labor force participation in the past and were now implementing policy reforms that continued to emphasize the importance of older workers. The experiences of these nations suggest that the nature of the reforms, the public availability and transparency of information on the reforms, and the strength of the national economy play key roles in extending older worker labor force participation.
section_title: What GAO Found
paragraphs: The retirement policy reforms in Japan, Sweden, and the United Kingdom are expected to lead to higher labor force participation of older workers. Japan is facing the most severe aging trend of the nations GAO studied, as its median population age is projected to be 28 percent higher than the United States in the coming decades. In response, Japan has enacted substantial benefit cuts to its national pension system by raising the eligibility age and reducing benefit levels to maintain fund solvency. Due to these changes, some Japanese workers will have to work to later ages. Sweden undertook the most significant reform by changing the structure of its national pension system from a traditional pay-as-you-go defined benefit plan, like the U.S. Social Security program, to a system where participants' benefits are more in line with their contributions. These reforms are expected to extend workers' careers by rewarding longer labor force participation with higher benefits. The system also incorporates flexibility by automatically adjusting benefits to changes in the economy and life expectancy to preserve financial stability. The United Kingdom will phase-in an increase in the women's national pension eligibility age so that it will be equal to the higher male age of 65. It also revised its benefit formula to raise the annual incremental increase for those who defer drawing their pension benefits. These changes either reward continued employment or discourage earlier retirement, and thus may promote continued labor force participation. However, although incentives to work to later ages have been created through reforms to their national and employer provided pension systems, officials from each nation stressed that these policy changes must be accompanied by labor market reforms and economic growth to provide job opportunities to older workers if they are to be effective.

section_title: Letter
paragraphs: As is the case in developed nations around the world, the aging of the U.S.  population will pose challenges to our national economy and retirement  income programs. Organizations as diverse as the World Bank, the  Organization for Economic Cooperation and Development (OECD), the  United States Federal Reserve, and others have studied these challenges,  which range from the growing fiscal pressures in national pension  systems caused by fewer workers having to provide benefits for greater  numbers of retirees, to potential economic strains due to shortages of  skilled workers as they exit the labor force. Most of these organizations  believe that greater labor force participation by older workers can be part  of the solution to mitigate the adverse effects of aging populations.
In light of the economic and labor force challenges posed by an aging  population, you asked us to draw upon the experience of other high- income industrialized nations in examining the following questions: (1)  How does the United States compare with other high-income nations with  regard to recent and projected trends in key demographic and labor force  characteristics? (2) How are recently enacted retirement policy reforms in  high-income nations expected to affect the labor force participation rate of  older workers? (3) What did these nations learn from enacting policies  that may increase the labor force participation of older workers?
To answer these questions, we compiled and analyzed demographic and  labor force data from the OECD, the United Nations Population Division,  and the International Labour Organization (ILO), highlighting data from  the United States and seven other comparison OECD nations. In addition,  we consulted with individual experts in national pension policy and  conducted an extensive review of the international retirement literature.  On the basis of this preliminary research, we identified three nations— Japan, Sweden, and the United Kingdom—that had displayed high levels of  older worker labor force participation in the past and were now  implementing policy reforms that continued to emphasize the importance  of older worker labor force participation. We then examined these nations’  pension systems—both national and employer-provided—and labor  market policies through interviews, literature reviews, and site visits. We  met with key government officials concerning pension and labor market  policy, representatives from employer organizations and labor unions, and  well-known scholars who have studied older worker issues in each nation.  We conducted our work between February 2002 and January 2003 in  accordance with generally accepted government auditing standards. For  more details on our scope and methodology, see appendix I. For more  details on the pension systems and labor market policies of our sample of  nations, see appendixes II to IV.
subsections: section_title: Background
paragraphs: The number of persons in the United States over age 55 will grow  substantially over the next two decades. Due to the aging of the baby  boom generation, older persons are becoming an increasingly significant  proportion of all persons and workers. In 2002, the U.S. Census Bureau  estimates that there were 61 million people over age 55 and their numbers  are projected to grow to 103 million in 2025. This growth will increase the  percentage of the population that is over 55 from 22 percent to 30 percent.
This shift in population age will affect the composition of the labor force.  The number of older workers in the United States is projected to grow  substantially over the next two decades, and they will become an  increasingly significant proportion of all workers. In June of 2002, there  were 19.2 million workers over age 55 and their numbers are projected to  increase to 31.8 million by 2015. This growth is projected to increase the  percentage of the workforce that is over 55 from 14 percent in 2002 to  nearly 20 percent in 2015.
The projected growth in the percentage of the labor force over 55 will  occur among both men and women. This would shift an earlier trend  among older men, whose labor force participation declined from the 1950s  until the mid-1990s. Since the mid-1990s, labor force participation among  older men has been relatively constant at 67 percent for men age 55 to 64  and 17 percent for men age 65 and older. The Bureau of Labor Statistics  now projects these levels to rise to 69 percent and nearly 20 percent by  2015. The expected growth in labor force participation rates among older  women would continue the current long-term trends of increases in their  participation. For example, the percent of women age 55 to 64 in the labor  force has steadily increased since the mid-1980s, from 42 to 52 percent in  2000, while rates among women 65 and older have grown from 7 to 9  percent in 2000. BLS projects these numbers to increase to 61 percent and  10 percent by 2015.
There are many factors that influence a person’s decision to work at older  ages. One key factor is financial incentives created by the rules regarding  eligibility for benefits from the national pension system—Social Security  in the United States. The decision to continue working is primarily related  to the trade-off between earnings and leisure time. The availability of  Social Security benefits allows workers to substitute non-labor income for  their earnings and to enjoy more leisure. Depending on the eligibility rules  and schedule of benefits, it can be more or less advantageous for workers  to retire at an earlier age rather than to continue employment. The  eligibility age for full Social Security benefits is currently 65 years and 8  months and rising, with reduced benefits available at age 62. If a person  elects to start receiving benefits at age 62, 63, or 64, the total lifetime  benefits they receive will be roughly equivalent. Even though delaying  receipt of benefits for 1 year is on average “actuarially equivalent or  neutral,” data from the mid-1990s show that most people (60 percent) elect  to start benefits at age 62. These benefits can be reduced if the beneficiary  has earnings above the income threshold when they are age 62-64. There  are no earnings limitations on Social Security benefits above age 65.
Another important retirement incentive is eligibility for employer-provided  pension benefits. In the United States, about half of the labor force has  some type of employer-provided pension coverage. Employer-provided  pensions are customarily classified into two major categories: defined  benefit and defined contribution plans. A defined benefit plan promises a  retirement benefit amount that is usually expressed as an annual payment,  derived from a formula based on a worker’s years of employment,  earnings, or both. In the United States, benefits in defined benefit plans  are insured by the Pension Benefit Guaranty Corporation (PBGC). Under a  defined contribution plan, the retirement benefit is expressed as an  account balance for the individual employee. This balance results from  contributions that the employer, the worker, or both make, as well as from  subsequent investment returns on the assets in the account. Under a  defined contribution plan, retirement benefits are not guaranteed by the  PBGC, and employees bear the risks of investment.
As different types of pension plans, defined benefit and defined  contribution plans provide workers with different incentives for either  retiring or continuing work. Defined benefit plans often provide incentives  for early retirement because they often do not increase retirement benefits  in-line with additional years of work with the firm after the early  retirement age. Under defined contribution plans, benefits can continue  to increase, consistent with continued contributions and positive rates of  return on assets. Since workers’ accounts increase in size proportional to  the amounts that are contributed by them or by their employers, they do  not create incentives to retire based on the benefit formula. In the past, a  greater percentage of pension-plan participants were covered by defined  benefit plans. In 1998, according to the Employee Benefits Research  Institute, 20 percent of households had defined benefit coverage only; 57  percent had defined contribution coverage only; and 23 percent had both  types of coverage.
Health status and occupation are other important factors that influence  the decision to work at older ages. As people age, they tend to encounter  more health problems that make it more difficult to continue working.  Thus, jobs that are physically demanding, usually found in the blue-collar  and service sectors of the economy, can be difficult for many people to  perform at older ages. Moreover, health status and occupation are often  interrelated since health can be affected by work environment. Blue-collar  and service workers, such as construction workers and janitors, often face  physically demanding work environments that may affect their health  status; these consequently lead to health impairments that affect their  ability to work to older ages. Although this group continues to face  problems, there is evidence that the health of older persons generally is  improving. This suggests that, compared with previous generations,  today’s older age population has an increased capacity to work to older  ages.
Although the Age Discrimination in Employment Act (ADEA) protects  workers in the United States age 40 and older from employment  discrimination, labor force participation is not solely an older worker’s  decision, as there must also be a demand for their labor. Employers’  perceptions of older people may form barriers to older workers’ retaining  their current jobs, finding new jobs if they are laid off, or re-entering the  labor force after retiring if their retirement income is inadequate. For  example, some employers believe that older workers have lower  productivity than younger workers, generate higher costs for employee  benefits such as health care and pensions, and represent higher costs for  recruitment and training since they have less potential time to recoup  these up front costs compared with a younger worker. Encountering these  obstacles could discourage older workers and influence their decision to  retire.
The labor force decisions of older persons are also influenced by the  availability of alternative employment arrangements. In the United States,  there has been interest among older workers who wish to work longer in  seeking employment arrangements that result in “phased retirement” or  “bridge employment.” Phased retirement usually refers to staying with a  career job on a part-time or part-year schedule while phasing out  employment over a number of years to complete retirement. Bridge  employment usually refers to leaving a career job and moving to part-time  work with another firm in the same or different industry, prior to complete  retirement. In the United States, nearly half of all workers age 55 to 65  utilize a bridge job before completely retiring.
Older Americans receive income through a variety of sources, with the  Social Security program constituting the largest share for most persons. In  2000, 90 percent of households with a person age 65 or older received  Social Security benefits. These benefits constitute more than 50 percent of  total income for 64 percent of these households. Social Security benefits,  on average, replace about 40 percent of a program-covered individual’s  pre-retirement income, if benefits are taken at age 62. Other major  sources of income for older Americans are asset income (received by 59  percent of households), retirement benefits other than Social Security (41  percent), and earnings (22 percent).  Social Security represents 41 percent  of aggregate income, earnings represent 23 percent, retirement benefits  other than Social Security are 18 percent, and asset income is 17.5 percent.
In the United States, the Disability Insurance (DI) program provides  compensation for the reduced earnings for individuals who have worked  long enough and recently enough to become insured and have lost their  ability to work because of a severe, long-term disability. DI provides  benefits to persons who are not able to perform substantial gainful activity  due to a physical or mental impairment. DI is not a major source of income  for a significant portion of older persons in the United States. In 2000,  7 percent of the population age 50-59 received DI benefits.
section_title: Adverse Labor Force and Demographic Trends Less Pronounced in the United States but Pose a Challenge
paragraphs: The recent and projected labor force participation and population aging  trends for most other high-income nations will be less pronounced in the  United States, but the aging of the population will nevertheless pose a  challenge to retirement income programs. ILO data for 2000 show that the  labor force participation rates for older U.S. workers, though not as high  as in previous decades, will be higher than in most other high-income  nations. It is expected that, because of higher fertility and immigration  rates, the U.S. population will also age more slowly than other high- income nations. However, even though the population of the United States  is not aging as rapidly as other countries, the old-age dependency ratio— the number of people over the age of 60 for every 100 working age people  (ages 15-59)—is projected to rise from 19 in 2000 to 35 in 2050. This near  doubling of the old-age dependency ratio will strain the resources of  programs that pay for retirement.
subsections: section_title: Older Workers’ Labor Force Participation Expected to Decline in Most High-Income Nations, although Rates Expected to Remain Relatively High in the United States
paragraphs: Even though the labor force participation of workers age 50 to 64 is  expected to decline in most high-income nations, including the United  States, between 2000 and 2010 (see fig.1), the United States has and will  continue to have higher rates of labor force participation for older workers  than most other high-income nations. In some high-income nations, such  as France, Germany, and Italy, about 2 to 4 percent of persons age 65 and  older participated in the labor force. In contrast, the labor force  participation rate in 2000 among U.S. workers age 65 and over was   10 percent (see fig. 2), the second highest labor force participation rate  among key high-income nations and 1.4 percentage points higher than the  aggregate for all 23 nations the World Bank has designated as high-income.  Labor force participation among U.S. workers age 50-64 was 66 percent  (see fig. 1). This trails only Sweden’s (79 percent) and Japan’s (73 percent)  rates for this age group.
The relatively high rate of labor force participation by older U.S. workers  is being sustained by an increasing percentage of older women working. In  the United States, as in other high-income nations, labor force  participation among older men has declined since 1950 and, for the most  part, is projected to continue declining through 2010 (see fig. 3). During  that same period, however, labor force participation among older women  is projected generally to rise (see fig. 4). In the United States, labor force  participation among women age 50-64 will nearly double from 1950 to  2010, increasing from 31 percent to 58 percent.
section_title: Adverse Demographic Trends Less Pronounced in the United States Compared with Other High-Income Nations
paragraphs: The size of the baby boom generation, rising life expectancy and declining  fertility are expected to contribute to a rising median age in high-income  nations. Because the baby boom generation is large in number, a growing  proportion of the populations in high-income nations will be over 60. In  the United States, for example, this will be the case for about a quarter of  the population. Moreover, as this generation has grown older, life  expectancy has increased in all high-income nations. From 1955 to   2000, life expectancy in the United States increased from 70 to 77 years  and is projected to increase to 80 by 2040.
As a result of these trends, the median age of the U.S. population, like that  of other high-income nations, is projected to steadily increase in the  coming decades, but it will still be lower than that of most high-income  nations. Specifically, the median age of the U.S. population in 2030 is  expected to be comparable to the current median ages in some high- income nations. For example, the median age of the U.S. population rose  from 30 to 36 years from 1980 to 2000 and is projected to increase to 40 in  2030 (see fig. 5). In contrast, the median age of the populations of high- income countries was 38 years in 2000 and is projected to rise to 45 in  2030. Germany, Italy, Japan, and Sweden have the current and projected  oldest populations with median ages ranging from 40 to 41 years in   2000 and projected increases to 51 to 54 years in 2050.
Two factors will slow the trend toward an older population in the United  States compared with most other OECD nations: fertility and immigration  rates. Although fertility rates in high-income nations have declined overall  since 1980, during the same time they have increased from 1.8 to 2.0 in the  United States. The United States also has an immigration rate more than  four times as high as Sweden and Japan, almost three times as high as the  United Kingdom, and higher than that of most high-income nations.
The consequences of these demographic trends are most evident in the  elderly dependency ratio. In most high-income nations, this ratio has been  rising throughout the last 50 years and is projected to grow at a faster rate  in the next half century (see fig. 6). The ratio in the United States is  relatively low compared with other high-income nations. For every   100 people of working age (15 to 59) in the United States, approximately  19 people were in or nearing retirement age (60 or above) in   2000 compared with a ratio of 22 for the aggregate of 23 nations the World  Bank has designated as high-income. This difference is projected to grow.  By 2050, this ratio for other high-income countries is projected to be 47 in  comparison with 35 for the United States. Even though the United States  ratio will be smaller than that of other high-income nations in 2050, it  represents an increase of over 75 percent from the 2000 ratio.
section_title: Key Elements of Reforms in Other Nations Expected to Increase Labor Force Participation of Older Workers
paragraphs: The recently enacted retirement policy reforms in Japan, Sweden, and the  United Kingdom are expected to lead to higher labor force participation of  older workers. Reforms adjusting benefits in the national pension systems  of each of these nations provide incentives for older workers to extend  their working lives. National and employer-provided pension reforms that  introduce defined contribution features that do not link benefits to a  specific age are also expected to encourage greater labor force  participation of older workers. Other reforms that seek to limit the use of  disability benefits as a route to early retirement will also influence the  older worker labor force participation. Acknowledging that improving the  employment opportunities of older workers is an important consideration,  each of these nations is studying or has enacted reforms that address the  issues of older worker’s employment more generally. Such reforms  include loosening or eliminating mandatory retirement age standards,  encouraging the elimination of age discrimination in employment,  improving older worker training, providing employment earnings  incentives, and exploring quality-of-work life issues such as the flexibility  of work arrangements.
subsections: section_title: Benefit Adjustments to National Pension Systems May Increase Labor Force Participation of Older Workers
paragraphs: Reforms in the United Kingdom, Japan, and Sweden that increase the age  at which workers are eligible for benefits or allow flexibility in when and  how pension benefits can be taken are some of the policy changes that  may encourage older workers to stay in the workforce. The United  Kingdom will phase in an increase in the age at which women become  eligible for national pension benefits, so that, beginning in 2020, men and  women will no longer be able to draw benefits before age 65. Japan has  also enacted reforms that will gradually increase the full eligibility age for  its earnings-based national pension system. In Japan, by 2025 for men and  2030 for women, the earliest age when this pension can be claimed will  have risen from 60 to 65. Rather than increasing the age for benefit  eligibility, pension reforms in Sweden allow older workers to take a full or  partial national pension (i.e., one-fourth, one-half, or three-fourths of a full  pension) at age 61 or later with no upper age limit and continue working.  This flexibility may make it easier to retire gradually with a mix of pension  benefits and earnings.
Additional pension reforms that change benefit calculations so they  reward continued work or discourage early retirement may also promote  continued labor force participation by older workers. Sweden changed its  benefit calculation to reward those who work longer. Under the new  pension system in Sweden, pensions are based on lifetime earnings,  instead of the highest 15 out of 30 years of earnings as they were under the  old system. The United Kingdom adjusted its benefit calculation formula  to increase the reward for those who defer drawing benefits from the  national pension system. For example, by 2010, individuals who defer  drawing their pension benefits will receive benefits that are 10.4 percent,  rather than 7.5 percent, larger for each year deferred. In Japan, reforms  have changed how pensions are calculated, reducing the level of benefits  for future retirees through lower accrual rates. The expected effect of  these changes is a 20-percent reduction in lifetime benefits by   2020, thereby making early retirement less affordable.
Finally, reforms in Sweden and the United Kingdom, in changing how  pension benefits are indexed, may discourage early retirement. The new  pension system in Sweden indexes pension benefits to life expectancy.  With increasing life expectancy, different generations of individuals with  similar work and earnings histories will have to work longer to maintain a  comparable  standard of living in retirement. This benefit adjustment  provides incentives for increased labor force participation by requiring  individuals to bear the cost of increased life expectancy, either through  additional work or lower benefits. The United Kingdom also revised the  index it used to adjust benefits in the portion of its pension that provides  flat-rate benefits. Prior to the reform, the United Kingdom adjusted  benefits using either the higher of increases in average prices or average  wages as an index. Now the United Kingdom uses only average price  increases. Since prices tend to increase more slowly than wages, this  reform has effectively reduced benefits relative to earnings.
section_title: To Increase Work Incentives for Older Workers, National and Employer-Provided Pension Reforms Moved Systems Towards Defined Contribution Features While Other Reforms Addressed Disability Insurance
paragraphs: Each of the nations we studied implemented reforms that included defined  contribution features in their national and employer-provided pension  systems, although this shift was more pronounced in Sweden and the  United Kingdom than in Japan. Defined contribution pensions are more  retirement age neutral than traditional defined benefit pension plans. As  part of its recent national pension reform, Sweden instituted a pay-as-you- go pension system with defined contribution features, including among  other things a fixed contribution rate and notional individual accounts (the  “notional defined contribution pension”). The new Swedish pension  system also includes a smaller, funded defined contribution plan with an  account for each individual worker (the premium pension). Reforms  introduced in the United Kingdom in 1988 and 2001 permitted individuals  to opt out of part of the national pension plan by participating either in  employer-sponsored defined contribution plans or defined contribution  individual pension plans called “personal pensions.” To participate in the  individual plans, workers obtain an account from a financial institution  and make contributions into their account or are provided access to a  pension by their employer. Japan implemented legislation permitting  employer-provided and personal defined contribution pension plans in  2002.
In Sweden and the United Kingdom, the inclusion of defined contribution  features in the national pension system has prompted complementary  changes among the employer-provided pensions. In Sweden, three of the  four major employer-provided pension plans converted from defined  benefit plans to pure defined contribution plans or plans with a mix of  both features following the national pension reform. In the United  Kingdom, many employers have closed their defined benefit plans to new  workers and replaced them with defined contribution plans. For Japan,  where defined contribution pensions were only recently introduced, there  is currently little data on the number of individual or employer-provided  plans being formed or on the degree to which employers are substituting  defined contribution plans for existing defined benefit plans.
The inclusion of defined contribution features in national and employer- provided pension systems is expected to encourage greater labor force  participation of older workers. Because workers will have a greater  responsibility for ensuring retirement through contributions and the  returns they can earn on them, it will be in their best interest to make  contributions for as long as they can. In addition, because defined  contribution plans often have greater portability than defined benefit  plans, older workers may have greater ability to shift to jobs that suit their  leisure and health needs rather than retiring.
Both Sweden and the United Kingdom, where disability insurance has  traditionally been an avenue to early withdrawal from the labor force,  have introduced reforms in recent years that will tighten eligibility of  disability benefits. In efforts to reduce the amount of early retirement  financed through disability pensions, throughout the last decade Sweden  has implemented successive reforms to tighten the eligibility requirements  for disability insurance. This has included eliminating the ability of older  workers to take a disability pension solely on the basis of long-term  unemployment or a combination of unemployment and medical reasons.  Medical reasons now provide the only valid criteria for granting a  disability pension in Sweden. As part of its efforts, the United Kingdom,  since the mid-1990s has tightened eligibility requirements, reduced paid  benefits, and provided more support for returning to the workforce after  an absence. For example, the government now reviews claims of  incapacity to work every 3 years compared to the previous policy of not  reviewing claims after the initial application, reduces or offsets disability  benefits if the recipient also receives an employer-provided pension over a  certain minimum level, provides services such as job search assistance to  the disabled as a way to enable their return to work, and will test a policy  allowing recipients to keep a portion of their wages if they return to  work.
section_title: Labor Market Policies May Reduce Barriers to Work at Older Ages
paragraphs: Each nation we studied has enacted, or is considering, policies that  address barriers to older workers’ continued employment such as  mandatory retirement and age discrimination. In conjunction with its  national pension reform, Sweden has already passed legislation giving  employees the right to remain in employment until the age of   67, prohibiting the widespread practice of collective bargaining  agreements prescribing mandatory retirement at age 65. As members of  the European Union, both Sweden and the United Kingdom must  legislatively prohibit employment discrimination based on age by 2006. It  is unknown how the European Union requirement will affect mandatory  retirement ages in specific industries or occupations in the United  Kingdom.
In the absence of legislation, both the United Kingdom and Japan have  encouraged employers to voluntarily end age discrimination. The United  Kingdom, for example, has publicized the benefits of an age-diverse  workforce, and issued best practices for eliminating age discrimination.  Like the United Kingdom, Japan has also encouraged firms to voluntarily  modify employment practices and retirement policies. The government  has programs that subsidize the wages of workers who take jobs at  reduced pay after mandatory retirement and subsidizes companies that  modify their employment practices to accommodate older workers.
Each of the nations we studied has also made some efforts to provide  older workers with access to training, job search assistance, and  workplace flexibility. In the United Kingdom, for example, one  government program provides job search assistance for people age 50 and  older when they have been out of work 6 months or longer and also offers  training opportunities and a wage enhancement. As part of its efforts,  Japan has employment job assistance centers (called “Silver Human  Resource Centers”) that provide older workers temporary jobs or  volunteer opportunities. The Japanese government has also promoted a  program to match older workers with suitable employers. In Sweden,  efforts include the creation of a commission to explore policies to  promote increased flexibility in working arrangements, such as granting  older people a legal right to work part-time, and adjusting the public  financing of education to promote skill development among older  workers.
section_title: Experiences of Other Nations Suggest That the Nature of Reforms Plays a Key Role in Increasing Labor Force Participation of Older Workers
paragraphs: The experiences of other nations suggest that the scope and  comprehensiveness of reforms, the transparency and availability of  information, and the strength of the economy play important roles in  encouraging labor force participation by older workers. According to  government officials in Japan, Sweden, and the United Kingdom, reforms  have a better chance of succeeding if they are comprehensive and  complementary. In addition, they said that education and transparent  information is important for helping workers understand what the reforms  will mean for their retirement income. Officials also agreed that a strong  economy was important for success.
Officials from each of the nations we studied said that the success of  national pension reform, including those elements that influence older  workers’ labor force participation, depends, in part, on the scope and  purpose of the reforms. Officials from all three nations noted that reforms  are most successful when they are comprehensive in scope. Both Sweden  and the United Kingdom, for example, in reforming their pension systems  also made changes to both their disability insurance programs and labor  market policies. Some officials also stressed that reforms should be  designed so that the intent of a particular reform is not thwarted by  countervailing policies in other areas. For example, Swedish pension  experts and other officials have acknowledged that the continued  presence of mandatory retirement ages in collective bargaining  agreements and labor regulations can work at cross-purposes with  features in the new national pension system that now relate benefit levels  to retiree life expectancy and that essentially have no upper retirement  age. They noted that to increase the effectiveness of the work incentives in  their national pension reforms, these impediments will have to be  resolved, as well as the need to establish complementary reform policies  that foster alternative work arrangements and quality of work-life issues  generally. Other nations also acknowledged the importance of  complementary reforms. Japan has supplemented its national pension  reforms with wage subsidies to encourage older employees to continue to  work. Japan and the U.K. also support their national pension reforms by  committing additional resources to organizations and services that provide  job search assistance to older workers.
Officials in each nation that we studied emphasized that access to  information and public education about how the reforms will affect  retirement income would also be needed if the reforms were to have their  intended effect. There is concern in these nations that many workers are  currently unaware of the implications of the reforms. For example,  surveys conducted by the Swedish government and advocates for senior  citizens indicate that many individuals do not yet have a detailed  understanding of the new pension system. U.K. government officials  expressed concern that their citizens could have similar difficulties  understanding the implemented reforms. To help their citizens understand  that they may need to work longer or save more in order to ensure an  adequate retirement income, each of the nations we studied has taken  steps to educate workers. In Sweden, the government has launched  several large information campaigns since the new pension system’s  implementation. In addition, participants receive annual statements of  their account balances in both the notional defined contribution (NDC)  and premium pensions. To help educate its workers, the U.K. government  has created a pension forecast tool that will present workers with  estimates of pension income from both government and nongovernment  sources. In Japan, because defined contribution pensions are very new  and offer both advantages and disadvantages to participants, employers  are required to provide information to employees about defined  contribution plan features and management.
In addition to the importance of information and education, government  officials and pension experts agreed that a strong national economy is  necessary for the success of pension and labor market reforms that may  contribute to higher labor force participation by older workers. A strong  economy eases the implementation of pension reform by offering  increased employment opportunities for older workers. High  unemployment and low economic growth will limit older workers’ ability  to remain employed, forcing them into complete retirement. Experts we  spoke with believe that the low growth of the Japanese economy during  the last decade has been a factor limiting the scope of pension and labor  market reform, for example, in the area of mandatory retirement ages.  Fiscal constraints also preclude more fundamental pension reform of  system financing and structure. In contrast, the currently strong U.K.  economy acts as an incentive for employers to retain their older workers  and there will likely be an increased need for older workers in the long  term, particularly as the workforce ages between now and 2020. The  current tight labor market also makes it easier for job search assistance  programs to find jobs for clients.
section_title: Concluding Observations
paragraphs: In many nations, despite their numerous differences, increasing the labor  force participation of older workers is an element of the policies chosen to  reform national pension systems. Officials from each of the three nations  we studied emphasized this issue should be considered in their own  nation’s reform efforts. Encouraging workers to stay in the labor force  longer can help alleviate the fiscal and budgetary stress induced by rising  national pension expenditures and can potentially enhance economic  growth. In those nations where national pension reform has included  benefit reductions, working longer can also enable older persons to avoid  serious reductions in their standard of living in retirement.
An important result from the experience of other nations is that to  effectively foster greater labor force participation among older workers,  individual reform components should be comprehensive in design so that  employment incentives operate in a mutually reinforcing manner. Thus, in  the nations we studied, changes in the national pension system were often  matched by corresponding complementary initiatives affecting employer- provided pensions and the operation of the national labor market. Officials  from each of the three nations we studied also identified other critical  labor market policies that needed to be harmonized with these changes,  particularly in the area of employment age discrimination and regarding  mandatory retirement ages. Such comprehensive reforms can face  formidable challenges to their design and implementation. In Sweden, for  example, where prospects may be more favorable because the national  pension system accounts for a large proportion of retirement income,  comprehensive reform remains a work in progress with continuing  discussion and debate. Nevertheless, the returns from a comprehensive  approach could far outweigh the risks of failure.
The reform policies chosen by other nations should be evaluated within  the context of their societies and institutions, however. For example,  benefit payments from the national pension system in Sweden currently  replaces a much larger percentage of pre-retirement income than in the  United States. Therefore, benefit reductions in these nations will have  significantly different effects on retirement income than similar actions  taken in the United States. In addition, reforms that more closely link  benefits to life expectancy, such as those implemented in Sweden could  have significantly different distributional effects in the United States. For  example, American subpopulations with lower average life expectancies,  such as African Americans, would be more adversely affected by this  policy change since they would collect benefits for shorter time periods  relative to other racial groups. African American men have shorter life  expectancies at birth and at age 65 compared to males of other ethnicities.
Finally, the focus on extending the labor force participation of older  workers has also led to a reconsideration of the traditional definition of  retirement where a person is either considered working or retired, to one  that is more flexible or continuous in nature. The long-term trend of  improved health and age longevity of older persons throughout the high- income nations now permits a range of options beyond the traditional  career employment/out-of-the-workforce retirement tradeoff.  Acknowledging this development, experts and officials from the nations  we studied noted the importance of quality of work-life issues, including  the wider use and availability of part- time employment and other  alternative employment arrangements, and fostering “lifelong learning,” as  other key components in a long-term strategy to extend the labor force  participation of older workers. In some ways, the United States has  already forged ahead in this area, through its prohibition of age  employment discrimination, broad elimination of mandatory retirement  ages, and through its public discussion of bridge employment, phased  retirement, and other alternative employment arrangements. However,  opportunities exist to do more. In recent work, we found that few U.S.  employers have focused on making such options available to their older  employees on any widespread basis, and numerous economic and  regulatory obstacles remain that can discourage the employment of older  workers. This led us to recommend to the Secretary of Labor that an  interagency task force be established to develop legislative and regulatory  proposals addressing the issues raised by the aging of the labor force. The  challenge of how to extend the work-lives of older employees, given the  new demographic realities of the 21st century, presents real opportunities,  not only to bolster economic growth but to help secure retirement income  adequacy for millions of working Americans and their families.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided copies of this report to the Secretary of Labor and  Commissioner of Social Security. They provided technical comments  which have been incorporated where appropriate.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies of this report to appropriate  congressional committees and other interested parties. Copies will also be  made available to others upon request. In addition, the report will be  available at no charge on GAO’s Web site at http://www.gao.gov. Please  contact  me at (202) 512-7215, Charles Jeszeck at (202) 512-7036, or Jeff  Petersen at (415) 904-2175, if you have any questions about this report.  Other major contributors to this report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
subsections: section_title: Analyzed Statistical Data
paragraphs: To determine how the United States fares internationally regarding current  and projected trends in key demographic and labor force characteristics,  we compiled and analyzed data from the United States and seven other  high-income Organisation for Economic Cooperation and Development  (OECD) nations. In conducting this comparison, we examined the fertility  rate, median age of the population, life expectancy at birth, old-age  dependency ratio, population by sex and age group, labor force  participation rate by sex and age group, and the unemployment rate by sex  and age group for each of the eight nations. We also compared the United  States to an aggregate for these characteristics that we constructed for a  broader group of 23 OECD nations.
section_title: Reviewed Literature and Conducted Interviews with Experts
paragraphs: In order to identify the dynamics of labor force participation rates of older  workers, particularly with regard to the key incentives that influence  work/retirement decisions, and to identify those nations that might be  most appropriate to illustrate the role of extending the labor force  participation in national pension system reform, we reviewed literature  and interviewed experts. We conducted an extensive review of the  international retirement literature, literature on the impact of aging  societies, and previous analyses of conditions in other countries. Our  review included research from organizations such as the OECD,  International Labour Organization (ILO), the Center for Strategic and  International Studies (CSIS), and the World Bank, as well as government  agencies such as Japan’s Ministry of Health, Labor, and Welfare; Sweden’s  Ministry of Industry, Employment and Communications; and the United  Kingdom’s Department for Work and Pensions. We also consulted with  experts from many of these organizations, including the CSIS, the OECD,  the World Bank, as well as the U.S. Departments of Labor and the  Treasury, and the U.S. Social Security Administration. In addition, we  conferred with individual experts affiliated with major retirement research  institutes at universities or other research institutes such as the National  Bureau of Economic Research, the Urban Institute, and the Brookings  Institute both for background information on national pension policy as  well as their recommendations on which countries to use as case studies.
On the basis of these interviews and our research review, we selected  three nations for intensive study that had high rates of labor force  participation for older workers and had enacted pension reforms within  the last decade: Japan, Sweden, and the United Kingdom. We chose Japan  for in-depth study for its extremely high labor force participation rates of  older workers, because it already has a large aged population that will  continue to grow significantly in the near future, and because it has taken  steps over the last decade to address the consequences of an aged society  through the reform of its pension system and labor market policies. We  selected Sweden for its high rates of labor force participation of older  workers, substantive reform to the national pension system, as well as its  tradition of extensive labor market and social welfare policies. We  selected the United Kingdom for its national and employer-provided  pension reforms that reversed a previous trend of rising national pension  expenditures (as a percent of gross domestic product) and for its active  labor market policies regarding older workers.
section_title: Conducted Site Visits in Three Foreign Countries
paragraphs: We performed a focused examination of these three nations’ pension  systems and labor market policies through site visits to each country.  During our on-site study of each nation, we met with key government  officials concerning pension and labor market policy, representatives from  employer organizations and labor unions, advocacy groups, and well- known scholars whose research has direct relevance to understanding  pension systems and older worker behaviors. In addition to speaking with  us, many interviewees provided relevant written materials and statistics  for our use.
section_title: Appendix II: Japan
subsections: section_title: Old-Age and Disability Pensions
paragraphs: Retirement income for the majority of Japanese is mainly derived from the  national pension system. Income from work constitutes the next largest  share of retiree’s income. Employer-provided pensions, or the earnings  derived from lump-sum retirement benefits, are a small portion of this  income. Disability pensions are used by a very small percentage of the  working age population.
subsections: section_title: National Old-Age Pension System
paragraphs: The Japanese national old-age pension system consists of two tiers, both  of which are financed on a pay-as-you-go basis. The first is the Old-Age  Basic Pension, which covers all workers and their dependents. The  premium for the basic pension is paid by the self-employed directly and by  employees through their employers. The second tier is the Old-Age  Employees Pension that covers salaried workers and their dependents,  about 70 percent of the workforce. The premium for the employee’s  pension is paid equally by the employee and employer.
subsections: section_title: Old-Age Basic Pension
paragraphs: This is a relatively small pension financed primarily by a fixed premium  paid either directly if self-employed or through one’s employer. One-third  of the financing comes from general revenues. Current premiums are  about $111 per month. Premiums are projected to almost double by 2020.  Benefit amounts are determined based on the number of months of  contributions, with 25 years of contributions required for full eligibility.  The average monthly benefit in 2001 was about $417. Full pensions begin  at age 65 and are not offset by other income. Pensions may be received as  early as age 60 at a reduced rate.
section_title: Old-Age Employees Pension
paragraphs: This is an earnings-based pension financed by premiums paid equally by  the employer and employee. The total premium rate is currently 17.35  percent of payroll and is projected to rise to 27.35 percent by 2020.  Benefits are calculated based on the year of birth, the number of months  in the system and average monthly earnings. There are two major  components of the employees pension. The first is the flat rate portion,  which is based on the year of birth multiplied by the number of months of  contributions. The second component is calculated using earnings and  months of contributions. The growth rate of benefits for each additional  year of work for this portion is determined by year of birth. The average  monthly employees pension was about $1,467 in 2001. Full pensions can  currently be received from age 61; eligibility ages are scheduled to  gradually rise to age 65 by 2030. Benefits are reduced until age 70 if  earnings while receiving this pension exceed a certain level.
section_title: Employer-Provided Pensions
paragraphs: Employer-provided pensions are primarily defined benefit in nature and  may be received as (a) lump sums, (b) annuities, or (c) a combination of  the two. The smaller the company, the more likely it is to use the lump- sum option. Benefits are available at mandatory retirement, usually age   60. About 90 percent of companies offer some type of retirement benefit,  with about one-third of full-time employees receiving benefits through  employee pension funds (EPF) and nearly the same level through what are  known as tax-qualified pension plans (TQPP). In 2001, two laws were  enacted that affect employer-provided pensions. The first, the Defined  Benefits Pension Law will impact EPF and TQPP. The second, the Defined  Contribution Pension Plan Law will allow the creation of new pension  plans for employees and individuals.
EPF are responsible not only for the occupational pension, but also a  carve-out or “substitution” portion of the national old-age employees  pension. EPF offer the remuneration portion of the old age employees’  pension and provide added benefits. According to the Pension Fund  Association these benefits should be 30 percent or more of the  substitution portion of the employees’ pension. About 43 percent of  employees in EPF take their benefits in the form of a lump-sum payment.
TQPP participants receive pension benefits that are contracted between  companies and financial institutions like banks or life insurance  companies. This arrangement is more likely to be used by smaller  companies, and benefits are likely to take the form of lump-sum payments  or fixed term annuities. The Defined Benefits Pension Law requires that no  new TQPP be created and all existing TQPP be transferred into new  contract- or fund-type pension arrangements.
New defined contribution pensions were recently introduced in Japan for  corporations and individuals. Contributions are managed by the  beneficiaries themselves, and pension benefits are paid as old-age benefits,  disability benefits, or lump-sum death benefits.
section_title: Disability Insurance Pensions
paragraphs: Disability insurance pensions are relatively rare in Japan. Like the two-tier  Old-Age Pension System, there are two tiers of disability pension. Slightly  more than 1 percent of the Japanese population receives one of these  pensions. The Disability Basic Pension has benefits similar to that of the  Old-Age Basic Pension with additional benefits for those with dependent  children. Approximately one million disabled individuals aged   20-64 receive this pension. The Disability Employees Pension benefits, like  the Old-Age Employees’ Pension benefits, are based on earnings and  months of contributions with additional benefits when a spouse is present.  Less than 200,000 disabled employees aged 20-64 received this pension in  2001.
section_title: Reforms over the Past Decade
paragraphs: Concern about the balance between benefits, retirement ages, and  contribution levels in the old-age pension system have been growing over  the last two decades. Proposals to raise the normal retirement age first  surfaced in 1980 and were finally agreed to for the flat-rate portion of the  employees' old age pension in 1994 and the earnings-based portion in 1999.  These eligibility age increases will be phased in over several decades. The  pension system undergoes actuarial reevaluation at least every 5 years to  balance premiums and benefits with existing socioeconomic conditions.
subsections: section_title: The Reform Process
paragraphs: The Japanese have used Pension Councils coordinated by the Ministry of  Health and Welfare to facilitate pension reforms. Pension Councils are  composed of representatives of employers’ groups and labor unions, as  well as academic researchers and government officials. While the Ministry  of Health and Welfare undertook the role of gathering and supplying  information, employer organizations and labor unions were able to  participate in the debate by means of participation in the Pension Council  as official members and by publicizing their views concerning pension  reform through editorials.
section_title: Eligibility Ages
paragraphs: The normal retirement age for the flat-rate portion of employee pension  will rise to 65 for men in 2013 and 2018 for women. Eligibility ages for the  earnings-based portion of the employee pension will rise to 65 in 2025 for  men and 2030 for women.
section_title: Contributions
paragraphs: The premiums for the basic (fixed) and employees’ (earnings-based)  systems are revised at least every 5 years based on the projected health of  the systems. Current premiums on the earnings-related pension total   17.35 percent of payroll. Both premium rates are expected to grow in the  future. The base of earnings covered by premiums to the employee  pension was expanded to include income from bonuses, but the total  percentage of earnings that will be needed to support the system has been  reduced.
section_title: Calculated Benefits
paragraphs: Employee pension benefit levels for those born prior to April 1, 1941, are  higher than for those born after that date. This is true for both the flat-rate  and the earnings-related portions of the pension. Pension benefit levels  were reduced by about 5 percent in 2000. It has been estimated that  lifetime employee pension benefits will be reduced by about 20 percent by  2020.
section_title: Employer-Provided Pension Reforms
paragraphs: Outside of the Pension Council process, changes were made to employer- provided pensions through the passage of the Defined Benefits Pension  Law and the Defined Contribution Pension Plan Law.
Enactment of the new Defined Benefits Corporate Pension Law requires  that existing TQPP be abolished by 2012 and their funds must transfer  either to the EPF or to new contract or fund-type corporate pensions. The  primary purpose is to improve protection of beneficiaries’ pensions.
The new Defined Contribution Pension Plan Law was designed to help  those unable to participate in a defined benefit pension system through the  creation of corporate and private defined contribution pensions. The  target group for this pension is the self-employed and employees of small  companies. Portability of pension benefits was also a factor in the creation  of the Defined contribution Pension Plan Law.
section_title: Labor Market Policies
paragraphs: The Japanese labor market has a number of features and practices that  affect the labor force participation of older workers. These practices may  enhance labor force participation up to a certain age but decrease it after  that point.
subsections: section_title: Lifetime Employment
paragraphs: During the period of high economic growth in the 1960s, companies  instituted long-term or lifetime employment policies that effectively  guaranteed employment until a worker reached mandatory retirement age.  These policies offered companies a way to ensure that their investment in  training achieved a positive return and provided workers job security. This  policy is limited in that it applies only to full-time workers who are  predominantly men.
section_title: The Seniority System
paragraphs: Promotions and wages are highly related to seniority in Japanese  companies. Under such a system, wages rise as longevity with a firm  increases. This is in part to reflect the greater knowledge and experience  gained with greater tenure, but also to reflect the rise in cost of living as  employees aged. Typically, the wage of a male employee rises until about  age 50-55, after which it falls sharply. For many workers at large  companies wages are 30-50 percent lower at age 65 than at age 55. This  reduction makes older workers more attractive to employers by making  them cost competitive with younger workers.
section_title: Employee Training
paragraphs: Training in Japanese companies usually takes the form of on-the-job  training. The training is usually highly company-specific and is closely  related to the seniority system. Training opportunities decrease once an  employee reaches a high level of seniority.
section_title: Age Discrimination and Mandatory Retirement
paragraphs: There is no law in Japan that prohibits discrimination on the basis of age.  However, recent legislation encourages employers to voluntarily not  discriminate against older workers in the hiring process. Japanese law  permits mandatory retirement, but the mandatory retirement age can be  set no lower than age 60.
section_title: Recent Initiatives Directed at Older Workers
paragraphs: The Japanese government has enacted some initiatives to encourage the  employment of older workers. Rather than legislate an increase in the  mandatory retirement age in the current weak economy, the government  has urged companies to extend the employment of older workers  voluntarily and to offer some employment services and grants that are  expressly targeted toward older workers.
The policies for accomplishing this are either employment extension  programs whereby workers who have retired are rehired or the company  may increase its mandatory retirement age. To date, the preferred course  of employers has been to offer reemployment or extended employment  where such action is beneficial to the company. Companies are provided  subsidies—called Promotion Grants to Secure Continued Employment— for this purpose.
Japanese officials advised us that there are no job training programs  geared specifically toward older workers. However, the Silver Human  Resource Centers offer skills training and job-matching services are  offered. These centers also provide seniors with temporary or short-term  community-related jobs. Other programs provide grants to employers to  develop the skills of the middle-aged and older workers to improve their  employability. There are also employment programs that focus on  providing information to employers on the benefits older workers offer  and how they can be accommodated.
Through the unemployment insurance system, subsidies are available  directly to employees 60 to 64 years old who are working full-time and  earning less than 85 percent of their former wage. This subsidy pays up to  25 percent of the employees’ wage after age 60 until age 65. Utilization of  this subsidy is low, however, due to the requirements placed on  participation. For example, recipients must be working full-time and must  be nominated by their employer. In addition, beneficiaries must have been  paying into the unemployment insurance system for at least 5 years and  the benefit period is reduced if they received unemployment payments  following mandatory retirement. This program will become less generous  and participation requirements will become more stringent in the future.
We were advised that participation in these programs, while small, is  expected to grow as the retirement eligibility ages of the national pension  system increases.
section_title: Appendix III: Sweden
subsections: section_title: Old-Age and Disability Pensions
paragraphs: Retirement income for the majority of Swedes is mainly derived from the  public national pension system. Employer-provided pensions, on average,  account for roughly 20 percent of total pension entitlements. These  pensions, however, are relatively more important to higher income  individuals (with incomes above the ceiling in the national old age  pension). Private (individual) pensions account for an even smaller  amount, but have increased in importance over the last decade. Disability  pensions have also been an important source of income for many who  leave the labor force prior to becoming eligible for an old-age pension.
The major components of the Swedish old age and disability pension  systems are undergoing important structural changes. With legislation  passed in 1998, Sweden began implementing a fundamental reform of its  national old-age pension system. In addition, there have been changes to  the structure of employer-provided pensions complementing the national  pension reform. Changes in the eligibility criteria and administrative  structure of disability pensions have also accompanied old-age pension  reform.
subsections: section_title: National Old-Age Pension System—Old System
paragraphs: The old national pension system was a pay-as-you-go defined benefit plan,  combining a flat rate universal benefit (the “basic pension”) with an  earnings-related supplement (the “ATP”). The basic pension, introduced in  1913, was the first compulsory old age pension in the world to cover all  citizens regardless of occupation. This flat rate pension was paid in full to  everyone with at least 40 years of residence in Sweden between the ages  16 and 65, or with 30 years of work. ATP was introduced in 1960. Under  ATP, a full earnings-related benefit could be obtained with 30 years of  covered earnings at age 65, based on the average of the best 15 years. The  normal (or statutory) eligibility age was 65 years for both the basic  pension and the ATP, but both pensions could be drawn from the age of   61 (60 prior to 1998) with a life-long reduction or postponed to the age of  70 with a life-long increase.
The national pension reform was the result of discussions that began in  the 1980s in response to concerns about demographic trends and  accelerated in the early 1990s in response to a serious economic crisis and  a change in the government. The old national pension system was seen to  be unfair in that it favored those who had short working careers or  variable earnings. In addition, the old system faced severe problems with  financial sustainability and was expected to require large increases in  contribution rates in the future.
section_title: National Old-Age Pension System–New System
paragraphs: The new national old-age pension system consists of an earnings-related  pension and a minimum guaranteed pension.
subsections: section_title: Earnings-Related Pension
paragraphs: The new earnings-related pension is a defined contribution scheme with  two components: a pay-as-you-go “notional defined contribution” plan and  a fully funded financial defined contribution plan (the “premium  pension”). The total contribution rate for both plans is 18.5 percent of  earnings, paid by both employers and employees. Unlike the old system,  the final pension in both plans is based on lifetime earnings. In addition,  there is no normal eligibility age in either plan. Benefits may be drawn, in  full or in part (i.e., one-fourth, one-half, or three-fourths of a full pension)  at age 61 or later with no upper age limit. Earnings may be combined with  a full or partial pension and will continue to generate pension  contributions. In both plans, individuals receive pension rights from  earnings as well as income replacement transfers (i.e., disability and  sickness benefits) and special credits (i.e., for time spent in child rearing,  university studies, or compulsory military service). Pension credits from  income replacement transfers and special credits are funded by general  revenues.
section_title: Notional Defined Contribution Pension
paragraphs: The notional defined contribution (NDC) plan is the larger of the two  earnings-related pensions, accounting for 86 percent of total contributions.  The NDC plan is financed according to pay-as-you-go principles, but the  system also includes pension reserve or “buffer” funds. The contribution  rate for the NDC plan is 16 percent, with contributions credited to  individual “notional” accounts. These accounts are notional in that  pension rights (i.e., claims to future pension income) and not financial  assets, are credited to them. During the accumulation period, the pension  rights credited to the notional individual accounts are indexed by average  wage growth. At retirement, the accumulated “notional capital” is  converted to an annuity related to estimated life expectancy at the age of  retirement and an assumed “norm” real rate of return (a 1.6-percent  increase in real average wages). This means that with increasing life  expectancy over time, other things being equal, individuals will have to  work longer or accept lower pensions. After retirement, benefits are  indexed by average wage growth minus the assumed growth norm of 1.6  percent. Thus, if real wage growth falls below the norm, the real value of  pensions will fall (and vice versa). An automatic balancing mechanism  places a further “brake” on the upward indexation of pensions and pension  rights if the balance in the pension reserve or buffer fund falls below a  certain level.
section_title: Premium Pension
paragraphs: The new Swedish national pension also includes an earnings-related,  funded defined contribution plan, the “premium pension,” in which  contributions are made to individual financial accounts. Participation in  the premium pension is mandatory, but the contribution rate (2.5 percent)  is low relative to that of the pay-as-you-go NDC plan. Individuals have a  great deal of investment choice (currently about 600 funds), and a default  fund is provided for those who decline to make investment fund choices  for their accounts. At retirement, these individual accounts may be  converted into either fixed or variable annuities.
section_title: Guaranteed Pension
paragraphs: In addition to the two earnings-related pensions, the new national pension  system also includes a minimum “guaranteed” pension for those with no or  low earnings. Unlike the universal basic pension of the old national  pension system, the new guaranteed pension provides a means-tested  benefit. The guaranteed pension is funded separately from the earnings- related pension; it comes completely out of general revenues. Unlike the  earnings-related pensions, individuals may claim benefits under this plan  no earlier than age 65. Benefits under this plan are indexed to the  Consumer Price Index (CPI), not to average wage growth as in the  earnings-related NDC plan.
section_title: Employer-Provided Old- Age Pensions
paragraphs: Roughly 90 percent of all workers in Sweden are covered by an employer- provided pension plan based on collective agreements between central  employer and union organizations. There are four different collectively  bargained, employer-provided pension plans: two separate plans for  workers in the private sector — one for white-collar workers and one for  blue-collar workers and two separate plans for public sector employees,  one for central government workers and one for municipal (and county)  workers. Traditionally, these pensions have been defined benefit plans,  closely linked to and supplementing the national pension. And, typically,  benefits in these plans have been based on final salaries. During the   1990s, however, the plans for private sector blue-collar workers and  municipal workers converted to defined contribution plans with  contributions paid by the employers. In 2003, central government workers  will also have a new pension plan containing defined contribution  features. White-collar workers in the private sector, however, continue to  have a largely defined benefit plan.
section_title: Private (Individual) Old- Age Pensions
paragraphs: Although private pensions remain a relatively small source of retirement  income in Sweden, there has been an increase in individual retirement  saving in recent years. Some analysts attribute this to the increased  attention to retirement income associated with the pension reform  discussion (and perhaps an increased awareness of financial markets  associated with the introduction of the premium pension), and/or  concerns about the impact of pension reform on future pensions  (especially among women).
section_title: Disability Pensions
paragraphs: The most common way for Swedish workers to leave the labor force  before the age of 65 has been with a disability pension. Prior to 1991, it  was possible to be awarded a disability pension for three reasons: first, on  medical grounds, for those aged 16-65; second, on medical and labor  market grounds (i.e., due to long-term unemployment), for those aged   60-65; or third, on labor market grounds only, for those aged 60-65 who  had exhausted their unemployment benefits. Disability pensions granted  exclusively for labor market reasons were called “58.3 pensions”: If a  worker aged 58 years and 3 months were laid off, he or she could claim  unemployment benefits up to age 60, and then claim a disability pension  for labor market reasons (until claiming an old-age pension at age   65). Eligibility requirements for disability benefits have been tightened in  successive reforms throughout the 1990s. The granting of disability  pensions exclusively for labor market reasons, for example, was  discontinued in 1991, and since 1997 medical reasons are the only valid  criteria for granting a disability pension. In addition, as part of the national  pension reform, disability insurance was separated administratively from  the old age pension system.
section_title: Labor Market Policies
paragraphs: Active labor market programs for the unemployed play an important role  in Sweden’s labor market policy. These programs have, for the most part,  always been open to workers of all ages. The Activity Guarantee program,  for example, ensures the long-run unemployed placement in job training  and re-employment programs. One-third of the participants are between  the ages 55 and 64. Swedish experts and officials argue, however, that  existing labor laws, workplace practices, and attitudes may create barriers  to continued employment among older people. They also argue that  reducing these barriers is increasingly important in Sweden in light of  pension reforms that encourage increased labor force participation. Some  policy changes have already been implemented in Sweden to reduce these  barriers, such as increasing the mandatory retirement age from 65 to   67 years. In other areas of concern–such as seniority rules, age  discrimination, employment and skills training, quality of work life and  attitudes toward older workers—possible policy changes are currently  under discussion.
subsections: section_title: Mandatory Retirement
paragraphs: Prior to the national pension reform, collective agreements in Sweden  established a mandatory retirement age of 65. That is, seniority rules (see  discussion below) were not applied to workers aged 65 and older, and  employers were permitted to terminate employment at that age. In May  2001, the Swedish Parliament added a new compulsory rule to the  Employment Protection Act, giving all employees the right, but not the  obligation, to remain in employment until the age of 67. Collective  agreements prescribing a mandatory retirement age of 65 are now  prohibited, although agreements covering the age at which employees  have the right to leave employment and receive a pension are still allowed.  Existing agreements prescribing mandatory retirement at age 65 were  allowed to remain in place until they expired but no later than December  31, 2002.
section_title: Seniority Rules
paragraphs: According to Swedish seniority rules, firms engaged in downsizing their  work force must follow the “first-in-last-out” rule, giving priority for  continued employment to those who have been employed the longest.  Some analysts argue that this protection for older workers helps to explain  the relatively high rate of employment among the 50-64 year old age group.  It is also argued, however, that this rule may promote early pensioning in  times of downsizing and possibly limit the mobility of older workers. Ways  to make seniority rules more flexible, while still offering employment  protection, are currently under discussion in the context of policies to  encourage older workers.
section_title: Age Discrimination
paragraphs: Advocates for older persons in Sweden view age discrimination as a  serious impediment facing workers who wish to remain employed later in  life. Sweden currently has no legislation against age discrimination in  employment. As a member of the European Union, however, Sweden will  be required to pass such legislation. In 2000, the European Union  established a general framework for equal treatment in employment and  requires all member countries to introduce legislation prohibiting  discrimination at work on the grounds of age, sexual orientation, religion  and belief, and disability. The directive gives member states until 2006 to  implement the provisions on age and permits considerable latitude in how  the directive is to be implemented in practice.
section_title: Training
paragraphs: Overall, the incidence of employment and skills training is relatively high  in Sweden, and older workers receive nearly the same amount of training  as younger workers. Some researchers and officials, however, believe that  the skills of older workers need to be enhanced, particularly those skills  necessary for adapting to changing work environments and pursuing  second careers. They have concerns that older workers may be  disadvantaged in acquiring such skills. It is difficult, for example, for  people over 40 years of age to acquire public loans for university studies.  There are various proposals to address these problems, including the  establishment of special higher education savings accounts to enhance the  financing of higher education for people of all age groups.
section_title: Quality of Work Life
paragraphs: Swedish researchers report that surveys of older employees in Sweden  find many would like to work longer but would prefer different types of  jobs and/or fewer hours of work. Thus, government officials and  advocates for older workers see “working life” issues—such as the need  for more flexible work time arrangements, the ability to switch to more  appropriate types of work, and management practices that create a  positive environment for older workers—to be critically important.  Recommendations to provide older persons with a right to work part-time,  to revise labor laws to allow for short-term contracts for older workers,  and to devise systems to make it easier to change job duties while  employed are under discussion. Negative attitudes toward older workers  are also a concern and are seen to create barriers to the employment of  older people. Surveys find that the majority of employers do not want to  hire older workers. This attitude is attributed to prejudice and  misinformation and/or work rules and practices that make older workers  more expensive. Government officials and advocates argue that  addressing these negative attitudes must be part of any comprehensive  policy change to promote the labor force participation of older people and  must be undertaken in the context of broader policies to promote the  overall well-being of older people in Sweden.
section_title: Appendix IV: The United Kingdom
subsections: section_title: Old-Age and Disability Pensions
paragraphs: Retirement income in the United Kingdom is made up of both government  and private sources. In the late 1990s, national pension benefits made up  38 percent of the national average wage. The government allows workers  to substitute employer-provided pensions or individual pension accounts  for the earnings-related portion of national pension benefits, and in the  late 1990s, about 75 percent of workers did so. About 60 percent of current  pensioners receive benefits from an employer-provided pension, typically  defined benefit and providing them with two-thirds of their final salary  after 40 years of service. With recent reforms, future pensioners are likely  to have more of their retirement income derive from defined contribution  employer-provided pensions or individual pension accounts. For low- income pensioners with little or no private pension income, the  government provides a larger earnings-related benefit, as well as means- tested benefits. Disability pensions have also been an important source of  income for many who leave the labor force prior to becoming eligible for  an old-age pension.
subsections: section_title: The National Old-Age Pension System
paragraphs: The United Kingdom’s national pension system consists of three tiers—the  state basic pension, an earnings-related pension, and discretionary savings  vehicles.
subsections: section_title: Basic State Pension
paragraphs: The Basic State Pension provides a flat-rate benefit of £75.50 per week for  a single pensioner (about $120 per week or about $6,200 per year). It is  adjusted annually for price inflation. To qualify for the full benefit, male  pensioners and female pensioners turning 65 after 2020 must have made   44 years of National Insurance Contributions. Female pensioners turning  60 before 2010 must have made 39 years of contributions. Workers who  are not paying contributions because they are unemployed, disabled,  caring at home for a child or relative, on state maternity benefits, or are  taking training courses may receive credits toward the Basic State  Pension. Workers with less than the required number of years of  contributions have their state basic pension reduced proportionately, but  workers must usually have made at least 10 years of contributions to  receive any benefits. In practice, the Basic State Pension is near universal  for men. It is becoming universal for women since the enactment of the  Home Responsibilities Protection Act in 1978, which allowed those caring  for children and people who are sick or disabled to earn credits toward the  Basic State Pension so long as they have made 20 years of contributions.
section_title: Means-Tested Benefits
paragraphs: Low-income older individuals are eligible for means-tested benefits, one of  which is the Minimum Income Guarantee (MIG). The MIG tops up incomes  of those age 60 and over with income less than £98.15 per week for a single  person (about $158 per week or about $8,200 per year) to those levels.  MIG benefits are increased annually with average growth in wages. The  MIG does have an earnings test. Each $1 of benefit is withdrawn for each  $1 in earnings above the MIG level.
In October 2003, the government will replace the MIG with the Pension  Credit, in part to reduce the MIG’s earnings test. With the Pension Credit,  each $1 of income will lead to a $0.40 decrease in benefits, increasing the  worker’s overall income by $0.60. The Pension Credit consists of two  elements: (1) a guarantee credit which tops up the income of a single  person to £102 per week (about $163 per week or about $8,500 per year)  and (2) a savings credit which provides a benefit to those with modest  savings, pension income, or earnings. The savings credit is designed to  taper away as an individual’s income rises and phases out for individuals  with £134.80 of income per week or more (about $216 per week or about  $11,200 per year). The eligibility age for the savings credit is currently   65. The eligibility age for the guarantee credit is currently 60 but will rise  in line with the increase in women’s eligibility age for national pension  benefits, so that it will be 65 by 2020.
Aside from the MIG, other means-tested benefits include assistance with  housing costs and local taxes. About 51 percent of U.K. households over  age 60 are eligible for means-tested benefits, although in 2000-2001 only   64 percent to 78 percent of eligible households claimed these benefits.
section_title: Earnings-Related Pension (State Second Pension)
paragraphs: The earnings-related pension, now called the State Second Pension,  supplements the Basic State Pension but may be substituted by several  types of private pensions. From its creation in 1978 until 1988, the  earnings-related pension (then called the State Earnings Related Pension  System) provided benefits of about 25 percent of workers’ average annual  earnings for the best 20 years. From 1988, benefits have been reduced to a  target of 20 percent of average lifetime earnings. In 2000, a technical  adjustment in computing benefits led to a further reduction. In April   2002, another reform was implemented which resulted in low- and  moderate-income workers receiving higher benefits as a proportion of  wages, while benefits for those with annual income above £24,600 (about  $40,000) benefits remain about the same. In the late 1990s, about   75 percent of covered workers substituted private pensions for the state  earnings-related pension. These private pension plans are either employer- provided pensions or individual pension accounts called personal  pensions. Personal pensions may be provided through financial  institutions or offered by employers. Employers with five or more  employees who do not offer an employer-sponsored pension must give  workers access to a type of personal pension called a stakeholder pension.  Stakeholder pensions have additional legal requirements, such as a  maximum administrative charge of 1 percent of the pension fund’s value.  In return for forgoing future State Second Pension benefits, individuals  who opt out of the state earnings-related pension for private pensions pay  lower National Insurance Contributions. Those who opt out for individual  pension accounts pay full National Insurance Contributions but receive  part of their contributions back as a rebate that is deposited into their  individual account. Those who opt out of the State Second Pension for  employer-provided pensions pay national insurance contributions at a  reduced rate. Similar to the Basic State Pension, the State Second Pension  allows individuals who are looking after a child under age 6 or an ill or  disabled person to qualify for State Second Pension benefits.
section_title: The Discretionary Tier
paragraphs: The third tier consists of additional forms of voluntary savings. First,  individuals can choose to make additional voluntary contributions into  their employer-sponsored pension plan. Second, individuals can choose to  make additional contributions into their personal pensions or stakeholder  pensions. Individuals will receive tax relief for these contributions up to a  certain ceiling. And finally, individuals can choose to make contributions  to a variety of other tax-relieved instruments, such as annuities and life  insurance.
section_title: Other Features of the National Old-Age Pension System
paragraphs: Eligibility Age: For the basic and earnings-related pensions, benefits may  be drawn at age 65 for men and 60 for women. In response to a European  Union directive requiring gender equality in member countries’ pensions  policies, women’s eligibility age will also become 65, with the change  gradually taking place between 2010 and 2020. The U.K.’s national pension  system does not have an early eligibility age.
Earnings Test: The U.K.’s national pension system does not have an  earnings test, meaning that benefits are not offset by the wages earned by  pensioners.
Deferral of Pension Benefits: If pension benefits are drawn past eligibility  age, benefits are increased by an increment of 7.5 percent per year of  deferral. In 2010, the increment will increase to 10.4 percent. The  government is considering pushing up implementation of the increase to  2006. It is also considering allowing individuals a choice between taking  the benefit increase as a lump-sum payment or as increases in each benefit  payment.
Funding: The Basic State Pension and State Second Pension are funded  on a pay-as-you-go basis by National Insurance Contributions shared by  employers and employees. General revenues may also be used to fund  pension benefits. Employers pay 11.8 percent of earnings above a  threshold for employees in the State Second Pension and between   8.3 percent to 10.8 percent for employees who have opted out. Employees  in the State Second Pension pay 10 percent of earnings above a threshold  up to an earnings limit, while employees who have opted out pay   8.4 percent. From April 2003, National Insurance Contribution rates will  increase by 1 percent for employers and employees on earnings above a  threshold. Employees will also pay 1 percent of earnings above the  earnings limit, and the earnings limit will be raised in line with inflation.  National Insurance Contributions also fund other benefits, including  disability, unemployment, and survivors’ benefits.
Sustainability: Changes to the U.K. national pension system, including  raising women’s eligibility age, increasing Basic State Pension benefits in  line with average price increases rather than the higher of increases in  average prices or wages, and making survivors’ benefits less generous, are  helping to maintain the long-term fiscal sustainability of the system. In  1984, the U.K. government projected that the National Insurance  Contribution rate needed to pay for national pension benefit payments  would be 23 percent by the 2020s. Currently, the contribution rate needed  to pay for benefits is estimated to be 18.2 percent by 2020. Pension costs  as a percentage of gross domestic product are projected to remain about   5 percent through 2050.
section_title: Employer-Provided Old- Age Pensions
paragraphs: Almost half of U.K. workers are members of either defined benefit or  defined contribution pensions provided by their employers. Employers  who offer pensions to their workers may pay lower National Insurance  Contributions by having their employees forego rights to benefits from the  state earnings-related pension. Employees in these plans also pay lower  National Insurance Contributions.
Until 1986, employers could only use defined benefit pension plans as a  basis for their employees to opt out of the state earnings-related pension,  and employers could require employees to join their defined benefit  pension plan. The Social Security Act of 1986 allowed employees with  either defined benefit or defined contribution employer-provided pensions  to opt out and allowed workers to choose whether to join the pension plan  provided by their employer. Since then, the U.K. has experienced a  movement of employer-provided pensions from defined benefit to defined  contribution. In 2000, about 81 percent of employees accruing benefits in  employer-provided pension plans were in defined benefit plans provided  primarily by large employers. However, of the plans open to new  members, about 70 percent were defined contribution. On average,  employers and employees make lower rates of contributions to defined  contribution plans than defined benefit plans. In 2000, employers  contributing to employees’ defined benefit plans contributed 11.1 percent  of earnings on average, while employers contributing to defined  contribution plans contributed 5.1 percent of earnings on average.  Employees contributed 5.0 percent of earnings on average to defined  benefit plans, while they contributed 3.4 percent of earnings on average to  defined contribution plans.
Employers who opt out of the State Second Pension by offering defined  benefit pensions are required to provide benefits that are broadly equal to  or better than the benefits employees would receive in the State Second  Pension. There is no such requirement for defined contribution pensions.  Typical defined benefit pensions offer benefits equal to one-eightieth or  one-sixtieth of final salary per year of membership in the plan, or half or  two-thirds of final salary for workers who have been in the plan for   40 years. Typical ages at which workers may draw full pension benefits are  60 and 65. The earliest age at which benefits may be drawn is 50. All  private sector defined benefit pensions are fully funded, while some public  sector defined benefit pensions are financed on a pay-as-you-go basis.
The government has recently announced several proposals for  encouraging employers to establish pension plans that encourage longer  labor force participation. For example, the government plans to increase  the earliest age when workers may begin drawing employer-provided  pension benefits to 55 by 2010. The government has also specified some  best practices for defined benefit employer-provided pension plans. These  include allowing those who work past normal retirement age to continue  earning pension rights and to receive a fair benefit increase. In addition,  the government is encouraging employers to calculate benefits from the  best year’s salary out of the last few years of employment so as not to  penalize people who change positions to reduce responsibilities at the end  of their career.
section_title: Disability Insurance
paragraphs: Disability insurance in the U.K. pays a bi-weekly benefit to adults who  cannot work. Currently, recipients age 50 and older number approximately  1,175,000 compared with approximately 160,000 recipients of  unemployment insurance. During the 1970s and 1980s, the U.K. expanded  and improved the coverage of benefits for disabled adults, then tightened  them in accordance with the current government’s overall “welfare to  work” strategy. Prior to 1971, those unable to work due to disability  received means-tested benefits. In 1971–2, the Invalidity Benefit (IVB) was  introduced. For those who had a sufficient National Insurance  contribution history, IVB provided an age-related income to those who  were disabled and not working. Claimant’s age and qualifications could be  taken into account in the criteria determining incapacity for work. Cash  benefits were not taxed and were indexed to earnings. Benefits generally  expanded and improved during the 1970s. However, in 1980, IVB (and all  other long-term benefits) indexation was changed to prices rather than  earnings, which ultimately provided recipients with smaller benefits. In  1995, IVB was replaced by the Incapacity Benefit (IB), at least in part  because these benefits were perceived to be subsidizing unemployment  and early retirement. The National Insurance contribution element for IB  requires contributions from work within the last 2 years, rather than in any  previous year. IB also has stricter eligibility criteria, testing if there is any  work the claimant could perform regardless of the likelihood of obtaining  such a job or its suitability. The assessment of capacity to work can be  ongoing rather than a once-only assessment. IB cash benefits, unlike IVB,  are taxable. Finally, income over £85 per week from an occupational or  personal pension, or certain types of health insurance payment will reduce  by 50 percent the amount of IB paid to the claimant.
section_title: Labor Market Policies
paragraphs: The U.K. government has begun a series of reforms that are designed to  increase employment opportunities and increase both incentives and  abilities to take on paid work for older workers. These reforms address  mandatory retirement and age discrimination, lack of training or skills,  and inflexible work and retirement options.
subsections: section_title: Mandatory Retirement and Age Discrimination
paragraphs: Although the U.K. currently allows employers to set mandatory retirement  ages for their employees, there have been efforts by the government to  encourage employers to extend employment opportunities for older  workers voluntarily. The government continues its campaign begun in  1993 to promote the benefits of an age-diverse workforce to employers. In  1999, the government issued a voluntary Code of Practice on Age  Diversity, which sets good practice standards for employers on eliminating  age discrimination in their business, in hopes that employers would retain  and hire older workers voluntarily. In 2000, the Cabinet Office issued a  report describing the economic and social reasons for promoting active  aging, a concept of improving people’s opportunity to contribute to society  and to the economy in their later working years, and laying out a plan of  action to encourage active aging. In response, one public employer has  raised and some private employers have eliminated their mandatory  retirement ages. For example, civil servants in the U.K. were subject to a  mandatory retirement age of 60, but now the majority of employees have  the option of staying on until age 65. Finally, the U.K. is moving toward  enacting legislation against age discrimination in employment, which is  required by a recent European Union Council Directive by 2006. Although  the government has proposed abolishing mandatory retirement ages, it is  not yet known if the legislation will address current legal provisions  permitting mandatory retirement policies.
section_title: Employment Assistance
paragraphs: The U.K. government offers several types of employment assistance for  older workers, including assistance with job searching, training, and  employment subsidies through the Department for Work and Pensions  (DWP). The DWP was created after the last election with the principal aim  of implementing the government’s welfare-to-work strategy. In 2002, the  government units responsible, separately, for disability insurance and  unemployment insurance were combined into the new government unit  called Jobcentre Plus, effectively placing services for recipients of  disability and unemployment benefits in a single office within the DWP.  Jobcentre Plus provides services through local employment assistance  centers where all unemployed clients go for assistance seeking jobs. For  example, personal advisors assist clients to search for jobs.
The New Deal 50 Plus program is one government program specific to  older people who want to work. Run through the Jobcentre Plus locations,  it offers assistance with job searching, training, and through employment  subsidies. This program was piloted in 1999 and went national in   2000. Since 1999, over 4,000 people ages 50-64 have received the training  grant and over 80,000 have received the employment subsidy. Until April  2003, New Deal 50 Plus participants receive the employment subsidy as a  cash wage supplement of up to £60 per week if their wages are under  £15,000. In April 2003, the cash employment subsidy will become a tax  credit for working individuals.
section_title: Quality of Work Life
paragraphs: Flexible working options for older workers is acknowledged as an  important issue by government officials, representatives of union and  employer organizations, and advocates. Despite the interest, employer  organizations and government officials contend that a tax rule prohibits  the receipt of employer-provided pension benefits while working for that  employer. The government has recently proposed changes to this rule.
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: Other contributors to this report include Anthony DeFrank, Anna Laitin,  Katharine Leavitt, Janice Peterson, and Yunsian Tai.