Differentiating retirement age to compensate for health differences

Increase in life expectancy is arguably the most remarkable by-product of economic growth and medical progress. Since the end of the 19th century, advanced economies have been gaining roughly 2.4 years of longevity every decade (Oeppen and Vaupel, 2002). But this trend – in combination with lower fertility – translates into population aging. In addition, this has far-reaching economic and sociopolitical consequences. Ceteris paribus, population aging will cause declining labor forces and rising old-age dependency. This may hurt economic growth and the overall quality of life if governments need to divert public spending from, say, education or infrastructure investment to fund elderly-related obligations.

Different approaches could be adopted to combat the contraction of the working age population and the rise of old-age dependency, and these have been explored theoretically and empirically (Acemoglu and Restrepo, 2018; Acemoglu, 2010; Vandenberghe, 2011; Vandenberghe, 2017). These include a higher female participation in the labor force (at least in the countries where it remains very low), slightly longer hours of work, less unemployment, or even shorter initial education (Vandenberghe, 2020). But so far, the most common form of adjustment retained by policymakers consists of raising the age of effective retirement. Researchers at the Organisation for Economic Co-operation and Development (OECD) (Martins et al., 2005) have shown numerically that indexing retirement age on (rising) life expectancy could stabilize old-age dependency ratios around their current levels, preventing dramatic tax increases to finance pay-as-you-go pensions, or a general reduction of the level of pensions. And indeed, stricter retirement policies implemented since the mid-1990s have proved effective at increasing employment rates (Atalay and Barrett, 2015), although from a historically low level (Costa, 1998).

However, one concern often raised is whether such policies are fair, as elderly workers may differ a lot in terms of their health status

A related but quite different question is how many individuals still have the capacity to work beyond a certain age. For an illustration of how SHARE data can be used to quantify that capacity at different ages and in different countries, refer to Vandenberghe (2021).

The question we ask more specifically in this paper is as follows: what would it take in terms of lowering(raising) the retirement age to ensure that all sociodemographic groups can expect to retire in similar (ill)-health? The normative foundations for such an objective are known in social choice theory as ex ante egalitarianism (Diamond, 1967; Fleurbaey et al., 2016). Furthermore, some of our results presented at the end of the paper – related to people's accomplished health at the moment of their retirement – illustrate the important difference that may exist between ex post and ex ante egalitarianism (Fleurbaey et al., 2016; Ponthiere, 2020).

Another important point is that the whole retirement age differentiation exercise presented here assumes that any impact of work/retirement on health is limited. Lowering or raising the retirement age (and thus varying the duration of the career) is supposed to have no significant impact on health, which means that the latter is primarily driven by age (our variable of differentiation/equalization) and other factors (genetic background, childhood health, circumstances, and so on).

And also, when considering differences across countries, macroeconomic variables such as gross domestic product/head or capital intensity.

The first result of this paper is that the degree of retirement age differentiation required to, equalize expected health – i.e., achieve ex ante equality – is important, ranging from 52 years in Poland (POL) to 79 years in Switzerland (CHE). It is also very important across socioeconomic groups within countries. On average, across the European Union, women should be allowed to retire 2.9 years earlier than men.

The result that women should be allowed to retire earlier based on their health is somewhat surprising as women have a higher life expectancy. But our result accords a recurrent result of the morbidity/mortality literature (Case and Paxson, 2005). Women have worse self-rated health and more hospitalization episodes than men from early adolescence to old age but are less likely to die at each age.

The remainder of this paper is organized as follows. Section 2 reviews the existing literature on retirement age differentiation and shows our contribution to that literature. In Section 3, we present the Survey of Health, Ageing and Retirement in Europe (SHARE) data on (ill-) health used in this empirical paper. Section 4 depicts how we compute the differentiated retirement ages. Section 5 presents the main results, while Section 6 concludes the paper.

This paper contributes to the literature on aging and retirement, and more precisely – on the importance of health (and indirectly, longevity) heterogeneity across countries, across sociodemographic groups within each country, and also among individuals within these groups. It explores empirically whether (and to which extent) policymakers should/can take that heterogeneity into account when designing pension systems, in particular, when deciding on legal retirement ages. This paper relates to the literature on health and retirement/labor supply, but with the important nuance that the focus is more on how age of eligibility should vary to account for the existence of a health gradient than on how the latter influences individuals’ timing of retirement (for a review of the latter question, see French and Jones [2017]). This shift of focus partially reflects the European context underpinning this paper, whereby retirement is still largely driven by State-edicted rules and decided paternalistically by the authorities. Along those lines, this paper relates to the literature on demanding occupations and (early)retirement provision (Pestieau and Racionero, 2016; Vermeer et al., 2016). Moreover, it presents empirical evidence about the difficulty of properly targeting (or “tagging”, using the term coined by Ackerlof (1978)) individuals suffering with ill-health. The tagging problem was discussed theoretically in the context of pension/disability benefit design (Cremer et al., 2007), wherein individuals self-report their health status using imperfect information, creating adverse selection. The problem documented in the final section of this paper is not so much about imperfect information causing adverse selection. It has more to do with the relevance of using group average differences, when what truly matters is addressing each individual's specific situation. A focus on group differences, with significant dispersion within each group, leads to what Cornia (1993) calls F-mistakes (failure of treatment) and E-mistakes (excessive treatment). Finally, this paper also relates to normative economics and social choice theory, in particular, the distinction between ex ante and ex post egalitarianism (Fleurbaey et al., 2016; Diamond, 1967). The equalization of expected health, which underpins most of this paper, is a typical application of ex ante egalitarian social criteria to the context of retirement; whereas our focus in the final part of the paper on residual/unaccounted health differences, and the importance for each individual of his/her “realized” health, undoubtedly points at ex post egalitarianism.

This paper uses Waves 1–2 and 4–7 (2004–2017) of the SHARE survey, i.e., a total of 238,363 Individuals × Waves (Table A1 in Appendix). All individuals in SHARE were 50 years or older of age when interviewed for the first time. Data limitations of different sorts (missing values or variables, absence of repeated observations as the country participated only in one wave) imply that, in the analysis, we retain only 20 out of the 29 participating countries Austria (AUT), Belgium (BEL), Switzerland (CHE), Czech Republic (CZE), Germany (DEU), Denmark (DNK), Spain (ESP), Estonia (EST), France (FRA), Greece (GRC), Croatia (HRV), Hungary (HUNG), Israel (ISR), Italy (ITA), Luxemburg (LUX), the Netherlands (NLD), Poland (POL), Portugal (PRT), Slovenia (SVN), Sweden (SWE).

SHARE contains a rich set of items describing people's physical health status, which we use extensively here. SHARE also contains information about people's mental and cognitive health, but we do not utilize this information in this paper. Most health items are self-reported, and many are subjective in the sense that they correspond to how people perceive and self-assess their overall health status (Table 1). But SHARE questionnaires also explicitly refer to many specific health conditions diagnosed by health professionals (heart attack, hypertension, cholesterol, stroke, diabetes, lung disease, cancer, etc.; see Table 2). SHARE interviewers also conduct measurements such as the maximum grip strength of respondents (last column of Table 2).

In the following sections, we make extensive use of physical ill-health indices. These are computed as the first principal component

The values reported have been standardized internationally. This means that a one-unit change of the index corresponds to one standard deviation of the international distribution of the health index

We deploy a two-stage estimation using the SHARE data. Stage 1 aims at identifying, for each country j, the degree of retirement age differentiation around the age of 67 years,

Internationally, the age of 67 years is gradually becoming the new reference (OCDE, 2019). Not so long ago, the statutory retirement age was rather 65 years, at least for men. This said, we lower that age to 61, 63, and 65 when doing robustness analysis (Section 5.2).

Stage 2 proceeds along the same lines as Stage 1, but within each country j and for each sociodemographic group k. The retirement age differentiation is computed around the Stage 1-estimated and country-specific retirement age a_j, using the ill-health gap applicable to group k and of the marginal impact of a year of age on the ill-health index βj,kaj\beta _{j,k}^{{a_j}} of that group around age a_j.

Important in such a setting are estimates of the ill-health index gaps and of the βs. As to the latter, we resort to fixed-effect (FE) estimation, which exploits the panel dimension of SHARE data (remember that SHARE consists of up to seven waves, measuring individuals’ ill-health every 2–3 years). In other words, the estimated βs only reflect the within-respondent deterioration of health over time. This eliminates many of the biases that may contaminate estimates based on cross-sectional data.

This paper has explored the idea of a differentiated retirement age policy aimed at accounting for people's health inequality when they grow older. Using European SHARE data on health and how the latter varies across countries and within countries across sociodemographic groups, we compute the degree of retirement age differentiation that would be required to equalize (ill)-health at the moment of retirement. Such a policy would be a way to systematize earlier suggestions that pensions reforms (in particular, those aimed at raising the retirement age) should make an exception for workers with demanding occupations, since health considerations may make it unreasonable to expect them to work longer. They also echo recent work on the fairness of retirement systems under unequal lifetime (Ponthiere, 2020); health and residual life expectancy are indeed highly correlated.

The results of this paper are essentially fourfold.

First, European elderly populations vary significantly in terms of their health around the typical retirement ages. This is true across countries (with tentative evidence that higher GDP per capita translates into better health), but also between sociodemographic groups within countries, with less-educated elderly individuals being systematically less healthy than their more-educated peers (something that might also be related to income differences).

Second, unsurprisingly, aging causes a decline of health. This is true in every European country considered here and across every sociodemographic group we examined. But this almost trivial result also means that advancing (or postponing) the age of retirement is a way to equalize the (expected) health at the moment of retirement.

Third, equalization can be achieved both across countries and within each country, but it requires extensive retirement age differentiation. To equalize the expected health for the different sociodemographic groups forming their populations, most European countries would have to admit >10 years of difference between those with the worst versus those with the best health status.

Fourth, there are limitations as to what can be achieved via health-based retirement age differentiation and the underlying principle of ex ante equalization of health. SHARE data clearly show that such a policy would still be prone to ex post inequalities, which consist of extensive F-mistake errors (failure of treatment, i.e., retirement rights not granted to people in poor health) and E-mistake errors (excessive treatment, i.e., retirement rights granted to people in good health). The importance to be given to these errors is a matter of ethical perspective. People who only care about ex ante equalization would probably consider that not much should be done about the residual/within-group differences and these F- and E-mistakes. The ex post residual inequalities are reflected in what econometricians call “within”-socioeconomic-group variation of the health status. Retirement age differentiation would, by construction, be based on “between”-group statistical (thus, ex ante estimated) differences. In Section 5.3, we show that allowing retirement age to differ across six groups (three Educational attainment levels × Gender) would account for (at the most) 9% of country-level health variance. If what matters socially is the equalization of each individual's health upon retirement – i.e., ex post equalization – then, the gains obtained from abandoning a uniform retirement age policy are probably limited.

Of course, policies other than differentiated retirement can be implemented. And some of our results are supportive of this option. For instance, the sheer magnitude of the achieved/ex post health status differences across individuals highlighted here legitimizes upstream public health policies, or other social policies aimed at combating health inequality, already in the early stages of life. Furthermore, the importance of the unaccounted interindividual health inequalities within our retirement groups probably calls for a less-statistical/ex ante approach and a more-individualized/ex post treatment of health differences. Would it be feasible? Probably not as part of a retirement policy, but maybe via disability insurance, or more precisely, the screening procedure that determines the eligibility of individuals to disability benefits. Contrary to statisticians telling retirement policymakers what could be done exploiting expected/ex ante health differences across sociodemographic groups, the doctors in charge of the screening are (at least potentially) assessing each individual's realized health. And this probably puts them in a position to achieve what theorists call ex post equality. In many countries, disability benefits are closely linked to old-age pension systems. And their role is to provide, on a case-by-case basis, “retirement” opportunities (i.e., replacement earning) to people who suffer from ill-health but are not yet eligible for proper retirement/pension money.

There is evidence (Banks et al., 2012) that with higher official retirement age, fewer early-retirement schemes, and also stricter unemployment benefits, disability benefits have, over time, come to represent an important pathway to retirement.