The effect of early retirement schemes on youth employment

Since the 1970s, the effective retirement age has dropped in relation to the age stipulated in the legislation, but in many OECD countries this trend has eased off in recent years. Contrary to quite widespread belief, delaying retirement from the labour market does not reduce youth employment, and may actually encourage it.

Factsheet

  • Geographical scope: OECD countries.

1. Context

Increased life expectancy and low birth rates have challenged the long-term sustainability of current pension systems. Numerous countries have opted to push back the mandatory retirement age in order to increase social security contributions and at the same time decrease the number of pensioners. However, some voices warn of the increase in unemployment that this measure could bring for younger generations.
 

2. Debate

Böheim and Nice (2019) hold that the argument whereby early retirement increases youth employment rests on two false premises. Firstly, there is no reason to believe that the number of jobs is limited; on the contrary, it is evident that as economies become more complex and specialised there is a tendency to create new jobs. In this way, prolonging working lives appears to have a positive effect on all age groups and stimulate the creation of new jobs. The second premise that these authors bring into doubt is that older workers are easily replaceable by younger ones, which according to Böheim and Nice again contradicts all the evidence on this aspect.

More light is shed on the issue by examining the effects of the recent pension system reforms on the effective retirement age and youth employment. The results of these changes show that the employment rates of older people are positively correlated with youth employment rates, although the reasons for this are unclear.

According to available data, early retirement does not cause an increase in youth employment, but it does appear to have a negative effect on economic growth. In this respect, it will require a greater effort from younger generations to maintain pension levels, either by shouldering a heavier tax burden or by hiring complementary private pension schemes.

3. Conclusions

Early retirement leads to higher labour costs and may diminish the demand for labour of any age. Many OECD countries are reviewing their social contribution and benefit systems in order to give older people incentives to remain in the labour market. These types of measures do not appear to entail risks of increasing unemployment among young people, but actually the contrary: they would boost employment in this age group. In the opposite scenario, the ageing of the working population could harm firms’ ability to innovate (Böheim and Nice, 2019).