The rise of working pensioners: the Swedish case

The old–age dependency ratio, which is the number of individuals age 65 or older in relation to those age 15–64, is projected to rise from almost 30 percent to 50 percent on average in the EU by 2060; see Figure 1. The projection shows wide variation among EU countries. The ratio is expected to be near or below 40 percent in Luxembourg, Ireland, Norway, Iceland, Belgium, Sweden, and Denmark. The corresponding level in countries like Slovakia, Portugal, Greece, Germany, and Bulgaria is 60 percent or higher. Although the ratio in the base year, 2015, is relatively high in Sweden at more than 30 percent, it will be among the lowest in Europe over the long term. Note that Sweden is the country with the lowest increase from2015 to 2060, just above 10 percentage points. The explanation is a relatively high fertility rate and large net immigration.

Figure 1

Figure 2 shows the change in the employment rate among older workers between 2006 and 2014. Sweden has demonstrated the largest employment growth in this category in Europe. The increase is highest among the richer countries; as shown in the figure, Sweden is followed Norway, Switzerland, the UK, and Germany, in that order. Countries such as Portugal, Croatia, and Latvia are found at the other end of the scale.

Figure 2

Figure 3 presents the number of persons who continue working while collecting old-age pension. In 2012, the average in the EU 28 for pension beneficiaries age 50–69who are still in work was around 16 percent. The highest percentages apply to Norway (38.7%), Iceland (37.2%), and Sweden (34.9%). The lowest percentages of working pension beneficiaries are found in countries such as Greece (1.9%), Spain (2.1%), and Belgium (7.0%).

Figure 3

This brief international overview shows that employment rates for older workers differ sharply from country to country with regard to factors including level, rate of change, and composition. Analyzing explanatory factors behind these differences is beyond the purview of this paper, but the description provides an interesting background and good reason to more closely examine the role of financial incentives in the frequency of gainful employment among older workers. For practical reasons, access to data not least among them, the analysis is limited to Swedish conditions. A somewhat more detailed background description for Sweden is provided in the following.

The age of retirement may be defined as the age at which an individual exits the labor market or the age at which an individual is granted or begins to collect a pension benefit. The Pensions Agency calls the first the “exit age” and the latter the “pension age.”

Each year, the Pensions Agency publishes four measures to shed light on exit and retirement. Three different measures for the “average pension age” and one measure of the “expected exit age.” The first definition of the average pension age is simply the average age at which people begin collecting their pensions, which was 64.5 years in 2013 according to the Pensions Agency. The two alternative definitions also include peoplewhowere granted sickness compensation at age 30–49 or after age 50, respectively. This results in an average pension age of 62.3 and 63.9 years, respectively. The reason for including sickness compensation is that for many people, this compensation may be regarded as an early pension and for older workers receiving sickness compensation, the benefit is converted at age 65 to the national pension, in many cases the guarantee pension. When the upper limit of 50 is used, good agreement is reached with the expected exit age, the age at which the person stops working, of 63.6 years. It should be noted that the Pensions Agency’s definition of the exit age is also based on the limit of age 50.

The old-age pension benefits considered are income based pension (inkomstpension)/ supplementary pension (tilläggspension), guarantee pension (garantipension) and, as mentioned in two of the definitions, sickness compensation (sjukersättning). People who collect only premium pensions are not regarded as pension beneficiaries in the calculations. In these cases, an individual’s pension age is defined as the age at which he or she is granted sickness compensation or begins collecting old-age pension and had not previously received sickness compensation. Individuals who collect only occupational or private pension benefits are not included in the measure.

It should be emphasized that the various measures of average pension age do not measure the time at which individuals stop working. It is, for example, permitted to collect a full old-age pension while continuing to work.

If we proceed from the definition based on the average age for collecting old-age pension, it has remained stable in recent years. However, underlying this stable level, there is a wider spread with regard to early and late collection. The picture is completely different if we instead study the exit age, the age an individual exits the labor market. Figure 4 from the Pensions Agency shows substantial change over time.

Figure 4

The figure shows the average age at which gainfully employed persons stop working, provided that they belong to the labor force at age 50. The exit age for men was 65 in 1970. This was followed by a long period of steady decline until the early 1990s, when the level was around The rise of working pensioners: the Swedish age 62.5. After a brief period at this level, the exit age rose to about age 64.5 in 2014, the highest level measured since 1970.

The trend has been similar for women since the early 1990s, but the level has been about one year lower.

The rise we have observed in the exit age entails a relatively steep increase in labor force participation among older workers. The increase has been ongoing for a long period; see Figures 5 and 6. There are a number of explanations for this increase, such as the reformed pension system and its rules, for instance, that pension rights are fully earned in the reformed system after age 65, the increased JSA, and reduced payroll taxes after age 65. Moreover, the 2003 rise in the “mandatory retirement age” from 65 to 67 under the Employment Protection Act seems to have had some impact. These changes should, however, have contributed mainly to the increases in the 65–69 age range and hardly at all to those aged 70–74. With respect to the increase of the oldestworkers, it is interesting to refer back to the particularly favorable conditions with eliminated payroll tax, which drastically reduces employment costs for these individuals.

Figure 5

Figure 6

It should be noted that working hours for those older than 64 are considerably shorter than among younger people. Table 1 presents working hours in 2014 according to the Pensions Agency.

Note that working hours have been taken into account in the previously shown calculations of labor force participation. An individual who works half the normal working hours (20 hours/week) is thus counted as one half of a labor force participant, etc. This adjustment naturally reduces the labor force participation rate.

It has been clearly shown that exit age and pension age provide two completely different pictures of the dynamics of the pension decision. We argue that the economically relevant measure is associated with the exit age, that is, with labor force participation. The intention is to shed light on this, and particularly how the combination of pension and labor income has developed.

As mentioned, a number of reforms were instituted in 2007 that entailed greater financial incentives for older workers to work. It is therefore interesting to study closely related changes in labor income. Figure 7 shows a relatively large difference in the percentage of older workers with labor income. Across the entire age range of 61–74, the percentage with labor income in 2011 is higher than the corresponding percentage in 2006, sometimes substantially higher. For example, the percentage of people age 66 with labor income has increased by about 10 percentage points.

It should also be mentioned here that the percentage of older people who work has continued to rise since 2011. According to SCB’s LFS statistics, the employment rate in 2012 was 14.9 percent for the 65–74 age stratum; the corresponding figure for November 2015was 17.1 percent.

Figure 7

This does not necessarily mean that the reforms implemented in 2007 explain this increase in labor force participation. We have already mentioned that the new pension system provided greater incentives to continue working in exchange for a higher pension in the future. Employer attitudes towards hiring older workers may also have changed. There are, of course, several causes that determine the changes in working hours observed over time. For many employees, at least short-term, it may be difficult to adjust their preferred working hours. For the individual who is employed and wants to increase their labor income through longer working hours, the decision is not up to the individual alone, but is also controlled by the employer’s preferences. One possibility is then to start and run a business instead of or alongside employment. The personal flexibility concerning choice of working hours is greater for the self-employed and it is reasonable to assume that these individuals are more likely to be influenced by financial incentives. This applies both to the decision to start a business as well as the choice of working hours. This mechanism is probably especially relevant in relation to older workers’ choices of working hours. Therefore, one possible way to isolate the effects on individual decisions is to look at business income.

Figure 8 shows how the percentage of older people with business income has developed over time. As evident, the percentage in 2011 is higher as a rule and some times significantly higher than the percentage in 2006, especially for men age 66.

Figure 8

Finally, it is also interesting to describe the steep rise in the percentage of individuals with both pension and labor income. Figure 9 shows how this percentage has increased since 2006 for various age strata.

Figure 9

The steep increase in the labor supply among older workers entails not only an increase in labor income, but also higher tax revenues and lower public transfers. Total tax revenues on labor income for the 61–70 age stratum have increased by about 30 percent since 2006 (a nominal increase of about SEK 23 billion). Part of this increase can be explained by the increase in the older population (of about 16 percent). The latter is yet another reason to study labor supply and labor income for this group. In 2011, there were more than one million individuals in the 61–70 age stratum and, as we know, this population is going to increase further in the future.

We have confirmed a strong increase in labor income among older workers that has had effects on individual standards of living as well as public finances. One essential question is to what extent this change can be explained by financial incentives, as well as the significance of other factors.

Two targeted tax reductions were introduced on 1 January 2007 that applied to people older than 65. The JSA, implemented for people of all ages, was designed so that it was considerably more generous for people over 65, while payroll taxes were lowered by about 16 percentage points. In 2009, a higher standard deduction was introduced for people over 65, while the level of the JSA was increased and its structure was simplified.

General payroll taxes were lowered for employees older than 65 so that employers paid only an old-age pension charge (10.21 percent). Employers were not required to pay any payroll taxes for employees born in 1937 or earlier.

While the increased JSA was intended to stimulate the labor supply among older workers, the payroll tax reduction was meant to stimulate demand and compensate for things like productivity downturns or workplace adaptations for older workers. According to the Employment Protection Act, individuals have the right to continue working until age 67.

As the focus of this paper is on the labor supply effects, a more detailed description of the increased JSA is provided. The JSA entailed higher relative profitability of paid work compared to pension income, but the standard deduction for older workers was simultaneously increased. In addition, effective 2009, people over the age of 65 also receive a higher standard deduction than other earners by means of a special supplement. This “increased standard deduction” has been raised on several occasions. The standard deduction for people over 65 was a maximum of SEK 62,300 in 2014; see Figure 10.

Figure 10

Figure 10 illustrates the profile for the standard deduction and the JSA. It may look like the standard deduction is more generous than the JSA, but this is not the case, as the standard deduction reduces taxable income, while the JSA reduces the tax.

Because, unlike the standard deduction, the JSA applies only to labor income, this entails a substantial increase in the profitability of work. This is an important difference: the standard deduction has only an income effect, which entails a potential negative effect on the labor supply of older workers. This effect is counterbalanced by the generous JSA, which creates incentives for an increased labor supply. The JSA captures the efficiency dimension and the standard deduction the distribution dimension. The substantial impact of the JSA is illustrated by Figure 11, which shows both marginal and average tax rates, with and without the JSA. The figure describes the tax on either only labor income or only transfer income, such as a pension. The picture is more complex for mixed incomes; see further below.

Figure 11

The effect of the JSA is greatest for lower income. For example, annual pension income of SEK 170,000 entails average tax of 20 percent, while the corresponding tax on labor income is only 7 percent.

Note that we have not included general payroll taxes in these calculations.

In summary, it can be said that both the increased JSA and lower general payroll taxes for older workers create strong financial incentives to work after the age of 65. There is obviously an interesting opportunity here to evaluate whether this has also increased the labor supply. This is analyzed using various methods and discussed in more detail in the next section.

This section first describes the evaluations of the targeted tax reductions for older workers that have already been implemented, following by a further evaluation of these reforms based on more recent data. A concluding section summarizes and attempts to explain the reasons behind the differences in the results.

The evaluation is based on an existing model, SWEtaxben. SWEtaxben can be described as a microsimulation model designed to evaluate how Swedish households are affected by changes in the tax and benefits systems. The distinguishing characteristic of the model is that it takes adjustment effects into account, primarily adjustment in the labor supply. This adjustment occurs via two different mechanisms and is modelled in two different ways: first, models for the probability of being unemployed, on long-term sick leave, on disability pension, and receiving old-age pension, followed by models that describe the change in working hours for those who work. This type of analysis requires access to high-quality databases. This requirement is largely met by the register data (LINDA) used. The sample amounts to almost 8 percent of the population, which provides high precision in the results. Because the sample weights are known, aggregate statistics for the entire population can also be calculated.

See Ericson et al. (2009) for a more detailed description.

The update will be described first in this section and then the modified version of SWEtaxben is used in the next section to evaluate the increased JSA. The results are compared with the earlier DiD results. An advantage of structural models is that hypothetical reforms can also be evaluated. One such hypothetical reform is to implement the increased JSA earlier, at age 61. This reform is also evaluated in the next section.

A natural approach to modeling combined labor and pension income would be to proceed from a labor supply model adjusted to older individuals. Unfortunately, this is not possible because LINDA data does not contain any information about working hours for older workers. For this reason, an alternative model structure has been used that consists of two separate but related decisions. First, a model for the decision to begin collecting old-age pension and then, assuming that the old-age pension is collected, a model that determines the size of the pension. Based on these two models, the percentage of pension income in relation to the potential income to which the individual is entitled upon full pension is calculated for each individual. If the percentage is one or near one, the individual is presumed a full-time retiree and the predicted labor income is little or zero. If the percentage is low, the predicted labor income is higher. The size of the labor income has been calculated based on the income levels observed in LINDA. Various levels were prepared for every age from 61 to 70 and separately for men and women. When labor income exists, working hours are also predicted, using an observed or predicted hourly wage.

Write labor income as WH, that is, hourly wage multiplied by working hours. When W and WH are known, H can be calculated.

The economically interesting variable in the model that describes the individual’s choice to collect their oldage pension is the replacement rate. This is defined as a ratio of net of tax income where the numerator is defined as the income if the individual is a full time pensioner (no income from work) and the denominator is the income if the individual is working full time (no income from pension). In these calculations the rules of the tax and pension systems are used as well as the rules of all other individual or household specific benefits. The calculation of pension income is based on all sources of income; public, occupational and private. For the married/cohabitant household the net of tax income is based on the income for the household. For instance the replacement rate for the male is calculated based on the observed income of his spouse and vice versa for the female. The sample consists of individuals age 61–70, with separate models used for men and women. We proceed from a balanced LINDA panel 2009– 2011; that is, all individuals are included in all years.

The dependent variable in the model takes value one if the individual has pension income; otherwise it is equal to zero. The control variables used are age, education, nativeborn, and indicators for the various years included, aswell as an indicator for whether the individual has labor income above the cap in the national pension system. The latter is intended to take into account the nonlinear effects of the pension-based income. In addition to nonlinear effects in income, such effects are also presumed for older workers. In order to describe this effect, we assume that age squared is significant, in addition to age. Unfortunately we lack information about the individual’s health status and health might be an important reason for the retirement decision. It is difficult to speculate about the expected effect of not including any health information but at leastwe should not expect any important changes in the general level of health during the short period used for estimation (2009–2011). Apart from a trend there might also be important across individual differences in health that could have an effect on the size of the estimated replacement parameter. Since we do not have any information about health in our data this is a problem that we cannot address. However, education is included and since there is a positive correlation between health and level of education this in part controls for the lacking health information.

The model has been estimated as a random effect logit with an initial value (the value of the dependent variable is the year 2009).

The results are presented in Table 6 and, as expected, the estimated parameter for the replacement rate is positive. This means that a reform such as the increased JSA (which entails a lower replacement rate) reduces the probability of collecting income from the old-age pension.

It should be mentioned that interpretation of the estimated parameters in this type of model is complicated. This complexity is partly due to that this is a nonlinear model and partly to that the intercept in the model is stochastic. If, despite this caution and assuming certain conditions, we calculate the elasticity of the replacement rate, we arrive at a value on the order of 0.2. An increase of the replacement rate by one percent thus increases the probability of collecting income from old-age pension by 0.2 percent. Using a simulation, which was the method used when the models were used in SWEtaxben, is a better method of estimating the effect of the size of the estimated parameters.

Table 7 shows the results for the model that determines pension size, assuming collection of old-age pension. The model was estimated using OLS and uses only data from 2011. As shown, the replacement rate is significant and the estimated effect follows an inverted U-shape. Pension income thus rises with the replacement rate, but at a decelerating rate.

Based upon the estimated model, it can be calculated that maximum pension income is attained at a value of almost 3. This is an extremely high value for the replacement rate; that is, a pension income that is three times higher than labor income. As only a very few individuals have such a high replacement rate, this means that an increase in the replacement rate entails an increase in pension income for virtually all individuals in the sample.

An update of SWEtaxben with the models described above combined with calibration to arrive at working hours and working income provides an opportunity to simulate the combination of labor/pension income. This new structure is used in the next section to evaluate the existing JSA for older workers as well as a somewhat modified version of the same.

Two reforms are evaluated in this section: the one that was actually implemented and one hypothetical. The implemented reform is the increased JSA as currently designed and the hypothetical reform is an expanded increased JSA offered to all workers over the age of 60. These two reforms are evaluated by comparing them with a tax system that does not include the increased JSA. In this tax system, all individuals receive the same JSA, regardless of age, and is thus the same that currently applies to everyone below the age of 66. The comparison population varies depending on which reform is evaluated. The evaluation of the current design of the increased JSA is based on all individuals age 66–70, while the equivalent for the expanded JSA is everyone age 61–70. In SWEtaxben, we make the somewhat simplistic assumption that everyone over age 70 is retired. We compare the outcome with and without behavioral effects and a summary of the results is presented in Table 8.

The results for the reform in which the JSA applies to people older than 65 are presented in columns (1) and (2). Without any behavioral modifications, the employment rate and labor/pension incomes are unchanged. The tax reduction of 1.0 percent that follows from the increased JSA increases disposable income and thus increases tax revenues from VAT. If all sub-components are mechanically totaled, we arrive at a total reduction of public finances of SEK 432 million. Without behavioral effects, the total cost of the increased JSA is thus calculated at SEK 432 million.

When household adjustments of pension collections and labor supply due to the increased JSA are taken into account, the consequence is relatively large. It turns out that the reform does not weaken public finances, but on the contrary strengthens them. The employment rate rises by more than 13 percent and working hours by 9 percent. This results in higher labor income and slightly lower pension income. Due to the increased labor income, the reduction in income tax revenues caused by implementing the JSA is no longer as large—a reduction of only 0.3 percent. The increase in labor income also generates a 3.7 percent increase in payroll taxes. The increase in labor income also results in higher disposable income, which generates higher VAT revenues. The total result for the public finances is a surplus of SEK 275 million; that is, the increased JSA generates income for the public finances. It should also be mentioned that the effect of changed transfer payments is included, but apart from pensions, these effects are small. The explanation for this is that the effect on household disposable income is not so large.

How comparable are the results based on structural models and microsimulation with the earlier results based on DiD? As mentioned, the DiD results yield an employment effect of 8–19 percent (disregarding the highest value). As shown in Table 8, the corresponding “structural” result of implementing the increased JSA is increased employment by about 13 percent. This is thus a comparable result, especially considering the earlier discussion of the comparability of the DiD evaluations. The more recent data used in this paper return a higher reform effect and it is also relevant to base the size of the effect on a comparison of the treatment group before the reform. Both of these factors indicate that a reform effect of about 13 percent is reasonable. However, one problem remains with the comparison because the earlier evaluations also included potential demand effects of reduced payroll taxes for older workers.

The main advantage of structural models is that hypothetical reforms can be evaluated. One question of interest is what effect a more generous JSA would have. Here, we choose to evaluate a reform in which everyone age 61 or older receives the increased JSA. At this lower age limit, it is possible to begin collecting the national old-age pension.

The results, which are presented on columns (3) and (4) in Table 8, include all individuals age 61–70. The expanded JSA brings an increase in employment and labor income while pension income declines. Compared with the previous evaluation, the negative effect on tax revenues is considerably larger. More individuals are included and, especially, considerably more who work and benefit from the JSA.Without behavioral modification, tax revenues decline by an estimated 1.8 percent. As this generates higher disposable income and higher total VAT revenues, the total budget effect amounts to a deficit of about SEK 1.5 billion. When we allow behavioral adjustments, the corresponding result is a deficit of only SEK 66 million.

The evaluation illustrates the importance of taking household adjustments into account, as well as that of including all effects of a reform on the various income and expenditure items in general government finances. The long-term effects that can be expected of a reform and how these differ from evaluations based only on a cross-section are discussed in the next section.

The long-term effect of the increased JSA is evaluated in this section. The evaluation includes both the current design, which applies starting at age 66 and the proposal to implement the JSA earlier, at age 61. The point of departure is a comparison with a situation in which there is no increased JSA, which is called the “reference alternative” in the following. Long-term effect here refers to the effect on public finances over a longer period of time. Any behavioral adjustments on the supply side after a reform are presumed immediate, and thereafter we study the effects this has on the capacity to finance the general government sector over the long term. The subject is thus not the long term adjustment of individuals but the long-term effects on general government financing.

The method used in this section differs from that used in the preceding section with regard to both the income and expenditure items included and the difference in long term and short-term. Comparisons may therefore be made only qualitatively and any difference in the size of the effects is of subordinate interest. One point of departure is based on a report of the long-term general government net lending presented in Flood and Ruist (2015); see Figure 12. General government income and expenditures have been calculated for each year until 2060, based upon the Ministry of Finance’s long-term calculations, see Ministry of Finance (2015), combined with the microsimulation model SESIM.

SESIMis a dynamic microsimulation model developed by the Ministry of Finance in collaboration with researchers. See www.sesim. org.

Figure 12

The crux here is that this type of description of the long-term financing of the general government sector may serve as a reference in the evaluation of reforms. The intention is not to discuss the credibility or the methods used to prepare these long-term forecasts. Other experts, such as the National Institute of Economic Research, make an even more pessimistic assessment of the development of general government net lending.

See for example the in-depth discussion of the long-term sustainability of general government finances in the NIER report for March 2015.

We have chosen to base our evaluation on the Ministry of Finance’s assessment. The point of departure for 2015 is a total deficit of about two percent of GDP. This deficit is predicted to decline rapidly in the next few years before rising again. According to the forecast, the deficit will persist until the mid-2040s, followed by a brief period of surplus until a balanced budget is attained at the end of the projection period.

The total net profile is largely explained by the age of the population. The sharp downturn in general government net lending from 2019 to 2035 reflects an aging Sweden. As shown in Figure 12, the percentage of older people in the population rises rapidly throughout the projection period. In 2015, individuals older than 65 make up 18.6 percent of the population and according to the forecast, this is expected to have risen to 23.7 percent by 2060. Expressed in the number of individuals, this is an increase of more than 1.3 million. Naturally, this entails a corresponding reduction in the percentage of the population who are of working age (20–64). In 2019 when the deficit is lowest, this group accounts for about 53 percent of the population and is expected to have declined to 48 percent by 2035. This results in a reduction in general government income, with direct taxes accounting for the largest reduction. The sharp upturn in general government net lending starting in 2035 and continuing to the end of the projection period is explained by that the percentage of older workers stops rising, and that the general population even becomes somewhat younger. The percentage of the population of working age increases modestly, to about 50 percent, and total income as a percentage of GDP rises compared with 2035 but is slightly below the 2019 level.

The evaluation of a forward-looking reform like the increased JSA should be seen from this perspective and the question is how great is the anticipated effect on long-term general government net lending.

In order to clarify the difference between the reference alternative (no increased JSA and no extended working life) and the alternative (increased JSA and extended working life), Figure 13 shows only the effect on net lending for people who are older than 60 and and only for the period of 2015–2034. The presentation concentrates on this age stratum because the reform being evaluated only affects older workers. In theory, the evaluation could be based on the entire population, but in order to clarify the results, it is advantageous to limit the analysis to the people who are affected by the reform. The choice of the long term, 2034, is governed by what appears to be a reasonable period considering that it is during this period that the deficit grows and the need for counter-balancing reforms is greatest. In contrast to Figure 12, net lending is defined in SEK billions and not as a percentage of GDP.

Net lending has been deflated with an income index. The choice of index is open to discussion, but is governed here by that net lending is largely constituted of pension income and these are indexed in the simulation by income growth or by an index closely linked to income growth.

Figure 13

Unsurprisingly, net lending is negative; for the reference alternative, the deficit varies from about SEK 350 billion in 2015 to about SEK 420 billion in 2034. These older individuals, above 60, make only a small contribution to general government finances: low labor incomes generate low tax revenues.

It should be noted here that these older workers have of course contributed to the general government finances earlier in their lives, but since we are only looking at their net lending contribution when they are older, the expenditure side dominates.

As evident in Figure 13, the results show a sharp reduction in the deficit. In 2034, this reduction amounts to about SEK 37–39 billion, where the higher amount refers to the increased JSA for people older than 65. The more generously defined proposal in which the JSA is implemented for people older than 60 results in a smaller reduction in the deficit, but the difference compared with the alternative where it is implemented for people older than 65 is not particularly great. The reason the reduction of the deficit is less when the JSA is implemented at age 61 is that this proposal entails a relatively large loss of tax revenues. Despite everything, a large percentage of the population age 61–65 is gainfully employed. For these people, the reform mainly entails lower tax on labor and thus lower tax revenues for the general government sector.

The reforms show a larger deficit in the initial years, which is explained by the assumption that the reforms are phased in to a certain extent, rather than taking full effect immediately. This is designed in such a way that the individual is assumed to adjust to a particular norm and that this norm increases during the projection period. During the period of 2015–2018, the norm is 65, rising to 66 for 2019–2021 and finally to 67 for 2022–2034. A random spread around this norm also occurs, and it is possible to combine collection of old-age pension and work. As mentioned, the total effect on employment is an increase of 6 percent.

That the effect of the reform can be phased in over time may seem to contradict the earlier description, where it was argued that the behavioral effect of the reform was immediate. It is important here to distinguish between the individual’s supply of labor arising from the change in working hours preferred by the individual prefer and the realized working hours that are dependent upon the demand side and other restrictions in the labor market. Here, this can be interpreted to mean that employers’ acceptance of and preference for retaining older workers increases with time.

Note that the calculation of general government net lending is based on all individuals older than 60. The purpose of estimating general government net lending for all people older than 60 even though the employment effect of the reform is estimated only for those who are age 66– 70 when the reform refers to the increased JSA for people older than 65 and 61–70, when the JSA refers to those older than 60, is that the potential changes that occur at 61–70 and 66–70, respectively, have effects on general government net lending over a long period of time. For example, a person who chooses at age 66 to continue working for a year or two will gain higher disposable income for the rest of their life. This higher income reduces the need for income from the basic social security systems (reduced general government expenditures) and generates taxes (increased general government income). To include these effects, it does not suffice to limit the calculations for those in the 61–70 and 66–70 age strata.

To express the reform effects in a more compact way, a net present value estimate of general government net lending is presented for both the reference alternative and the two alternatives that entail longer working life. The net contribution for year t, calculated for all individuals older than 60, may be expressed as

where I_ti, refers to all income to the general government sector that the individual pays in year t, and U_ti are the expenditures by the general government sector that the individual receives in the same year. N is the number of individuals older than 60. In order to estimate the total net vis-à-vis the general government sector for 2015, the net present value of all future net contributions is calculated

as follows:

where r is the discount rate and T = 2034.

The results of this evaluation are presented in Table 9. At a discount rate of zero, the net present value of the deficit for the reference alternative is SEK 7,532 billion. At a discount rate of 3 percent, the corresponding deficit is SEK 5,537 billion. As mentioned, these calculated amounts are intended only to be used as a reference to assess the size of the long-term effects of the reforms that include the increased JSA. As shown in Table 9 and as already presented in Figure 13, the increased JSA (and thus the presumed extension of working life) significantly reinforces public finances. Compared with the reference alternative, a reduction of the deficit is expected on the order of 5–7 percent, depending upon the age at which the JSA is implemented and the choice of discount rate. Note that both the current system and the proposed lower age limit for the increased JSA are both overfunded. The degree of overfunding is somewhat higher for the reform with the higher age limit.

The results show a sharp reduction of the accumulated deficit compared with the corresponding deficit for the alternative without the increased JSA (and thus without higher employment). How can such a strong effect be explained? The most important reason is that the number of older workers increases during the period up to 2035. A strong argument in favor of the increased JSA is that this reform is well-adapted to an aging Sweden. This is also the most important difference compared to the earlier evaluation performed in section 2.4. The point of departure there was a change in the employment rate during a single year based on the number of older workers that year. The long-term analysis takes into account that the population of older people rises over time, and thus the population affected by the reforms, and that there is a large net contribution to the general government sector for every new individualwho remains inwork. The long-term effects of general government net lending take into account several income and expenditure effects that were not included in the short-term evaluation presented in section 2.4. Additional years of work towards the end of working life generate higher tax revenues and payments into the pension system. On the expenditure side, gains are seen in the form of deferred pensions and lower expenditures for basic social security. This is a good example of double gains. This is a strong argument that a policy that creates incentives to defer pension collection can verywell be both self-financed and overfunded over the long term.

The intention of the long-term evaluation is to illustrate the need for reforms that are adapted to future challenges. The most important of these are the expected demographic changes that will in all likelihood occur in the next few decades. Alternative evaluations are reported in the long-term calculations by the Ministry of Finance. These contain various future scenarios in which, for example, the effect of increased employment is included. The results are presented as various balance measurements, but the fundamental principle is the same.

The Ministry of Finance bases its calculations on two sustainability indicators, S1 and S2, both developed by the European Commission. These indicators are intended to quantify how much net lending must be adjusted to attain financial sustainability.