2  Trends in retirement

Labour force participation rates among OECD countries for the working age population as a whole have been fairly steady over the past 30 years. They rose by an average 0.2 percent per annum between 1975 and 1989 but then fell by 0.1 percent per annum through the 1990s. These growth figures refer to the average participation rates for the population in each country aged 15 and over. However, these broad trends disguise some noticeably different movements across countries, among age groups and between men and women. In this paper I concentrate on the age groups approaching retirement.

Across many OECD countries, the trend over the past 30 years has been for people to retire at a younger age, despite evidence of improvements in life expectancy. This trend can be seen in generally falling rates of labour force participation among males in the age group 55–64 years, as shown in Figure 1. In their research programme on social security programmes and retirement around the world, Gruber and Wise (2002) comment that the decline in labour force participation of older persons is perhaps the most dramatic feature of labour force change over the past decades.

Figure 1- Proportion of males aged 55-64 who are in the labour force

Source: OECD Labour Market Statistics for countries other than New Zealand.  New Zealand data from Census documents (prior to 1986 these have been adjusted for a change in the coverage of ‘actively engaged’).

Figure 1 shows that the experience of New Zealand stands in contrast to that of other countries. The decline in labour force participation rates of older males that New Zealand shared with other OECD countries over the period 1971–1991 was reversed over the subsequent 10 years. New Zealand changed from experiencing a participation rate that in the earlier period was about average among the comparator countries shown in Figure 1 to one that, by 2001, was clearly higher than all the other comparator countries.

A similar pattern of divergence between New Zealand and other OECD country participation rates has occurred since 1991 in the case of older females, but in this case it has overlaid a generally rising trend of female participation.

This paper argues that the primary reason for New Zealand’s sharp turnaround in older people’s labour force participation since 1991 was the phased increase in the eligibility age for the public pension, NZS, from 60 to 65 years, which commenced in 1992. Delayed eligibility to the public pension has resulted in many people delaying their retirement from the paid work force.

2.1  Retirement decisions and pension policy design

Clearly, many factors can influence individual decisions about when to leave the paid work force. Among the primarily non-financial reasons for leaving the labour market could be poor health, family caring responsibilities, the retirement of a spouse, pressure of informal age-based discrimination, redundancy and a wish to undertake voluntary work or simply to enjoy more leisure time. Possible financial factors affecting individual retirement decisions would include accumulated assets, current and prospective earnings and the value of any pension entitlements.

This paper focuses on the factors that help to explain cross-country differences, by age and gender groups, in average rates of labour force participation, rather than factors that tend to differentiate among individuals. It uses census data and an analysis of changes in public pension policy settings to estimate the strength of one of these factors in the New Zealand setting. A more complete explanation of the variability of individual retirement behaviour would require an analysis of longitudinal unit record data (such as the US Health and Retirement Study), which is not available for New Zealand for the period of interest[3].

Public policy can affect the financial incentive to retire through different channels. First it can affect the replacement rate, that is, the ratio of the amount of income in retirement to income when in the paid work force. A high replacement rate means that the opportunity cost of leisure, in terms of foregone consumption, is low, making retirement a relatively more attractive option. The replacement rate facing a worker at a particular age can be influenced by policies that determine eligibility for a retirement pension or similar benefit, conditions that might attach to that benefit, and the net level of pension entitlement.

The second channel of influence is through changes in net pension wealth that occur when a worker defers retirement. Such a deferral may result in a larger future annual pension entitlement, but for a smaller expected number of years. If the discounted value of that pension stream is less than the discounted value of the pension stream available by retiring today, then continuing to work carries an implicit tax. Conversely, if pension wealth increases by working an additional year, there is a subsidy to delay retirement (OECD, 2002: p143). The way in which a country’s public pension entitlement formula responds to changes in earnings and years of contribution will clearly affect this incentive.[4] Less directly, public policies that encourage or discourage the development of voluntary private and occupational saving schemes may affect the retirement incentive, since such schemes provide further options, such as lump-sum benefits at an earlier age.

An important factor influencing retirement rates is the age at which a person can claim a retirement benefit. Many countries’ pension plans set both a ‘normal’ and an ‘early’ retirement benefit eligibility age. The retirement rate at both these specific ages is typically substantially greater than would be predicted on the basis of financial measures alone. This may be due to a liquidity constraint (people having insufficient savings to retire before any public benefit or pension is available) and a ‘social custom’ effect, where the normal age of pension eligibility is regarded as the customary age of retirement (Gruber and Wise, 2002).

The substantial reduction in effective retirement ages in most OECD countries over the past 30 years can be explained largely in terms of wider access to pension schemes offering early retirement options and other incentives towards early retirement that were part of the structure of many pension schemes. There are now signs that the trend to earlier retirement has become a matter of concern for OECD countries facing the fiscal, employment and growth implications of aging populations and many are now starting to change their policies with the aim of increasing the labour force participation of older people (OECD, 2002). The OECD (2005a) reports that since the late 1990s effective retirement ages have increased by more than one year in Australia, the United Kingdom and Finland, and by more than two years in Italy.