Academic Literature

Labour Force Participation Of Older Workers In Sweden – The recent rise

Between 1963 and 2000 the labor force participation rate among males in the age group 60–64 in Sweden fell from around 85 to 55 percentage points. However, since then, the labor force participation has started to rise again and is now above 75 percent in the age group. Although the long term development for female labor force participation has been dominated by the great increase in employment of married women, the recent development shows a similar pattern to that of the males.

This paper studies the background to the increase in labor force participation of older workers in Sweden since 2000.

In the first part, we looked specifically at four changes in the Swedish population: (1) The improvement of the population health; (2) The increase in the educational attainment of the labor force; (3) The improved physical work environment; (4) The increase in female labor force participation rates. For the first two changes, we found that it is likely that they have contributed to the increase in labor force participation of older men. Although there has been a continuous change in mortality rates for men in the age groups 55–59 and 60–64, it seems like the changes have been stronger in recent years. This picture is confirmed also by the self-assessed measure that we reported. Also the changes in educational attainment seem to have contributed. Again, there is a trend towards more education across the birth cohorts, but the increase seems to have been stronger, in particular for higher education, in the cohorts born in the early 1940s, who were in their early 60s in the beginning of the 2000s.

For the second two changes, we found no support for that they would have been important for the increased employment rates for older men. The largest improvement in work environment seems to have happened earlier, already in the 1980s, when the labor force participation rates of men were still decreasing. The same seems to be true for the increased female labor force participation rates and the joint retirement decisions hypothesis: the great increase in the relative labor force participation rates happened across the cohorts born in the 1930s, for which the labor force participation rates in the older age groups were decreasing.

In the second part of the paper, we studied the effects of four institutional changes that may have led to delayed exit from the labor market. The stricter rules for disability insurance eligibility, and the implementation of these rules at the Social Insurance Agency, appears to have had a very strong impact on labor force participation. Also the income tax reductions due to the earned income tax credit and payroll tax reduction for older workers seem to have delayed labor force exit, while the 2001 reform of the mandatory retirement age seemed to have had a surprisingly small immediate effect on labor force participation in the age group 65–69.

For the most important policy change during the era under study, the great reform of Sweden’s public old-age pension system, there are a number of circumstantial evidence for that it actually did affect retirement behavior through changes in labor supply incentives. First, the staggered implementation of the reform across cohorts coincides with increased labor force participation rates. Second, a large share, about 45 percent for men and around 67 percent for women, of the delayed exit from the labor market that we observe for the cohorts between those born in 1935 and 1943 can be attributed to the group that retire through the old-age pension pathway. Third, we observe a smaller average gap between when the workers retire and when they start to claim their benefits from the public old-age pension program, which is consistent with the presumption that the pension reform actually implied changes in labor supply incentives of the elderly.


4.1 Swedish Pension Reform
A major pension reform was decided in the Swedish parliament in 1998. The primary aim of the reform was to make the pension system financially robust. Projections showed that the pre-reform, defined benefit (DB) system required increased payroll taxes to be financially viable in an environment of an aging population. An additional aim was to strengthen the relation between the contribution made to the system and the benefits received – i.e., the actuarial fairness of the system – which affects the economic incentives for labor supply.
There were three main elements of the reform:
1. As opposed to the old supplementary, income-related defined benefit (DB) national pension plan (ATP), the new pension scheme is a so-called notional defined contribution (NDC) plan. The payroll tax devoted to the public old-age pension system is fixed to 18.5 percent of the individuals’ annual wage sum in the new system.7 Of these, 16 percent is devoted to a pay-as-you-go system based on so called notional accounts and the rest, i.e., 2.5 percent, is devoted to a fully funded
scheme.
2. The sizes of the individual benefits from the new pay-as-you-go scheme are proportional to the contributions made throughout the insured individual’s life cycle. In the pre-reform scheme they are proportional to the earnings received during the individual’s best 15 years at the labor market and with reductions if he or she contributed less than 30 years to the scheme. There was also an actuarial reduction of 0.5 percent for each month the pension was claimed before the 65th birthday and a 0.7 percent increase for each month the pension was delayed after that age. There is no earnings test in any of the two pension systems.
3. A fully funded pension program was introduced. For this part, the insured individual is able to choose between a large number of private fund managers, or remain in the default fund, managed by the public authorities.
The new pension system was implemented gradually by year of birth. The first cohort to be covered by the post-reform system was those born in 1938. They are by 20 percent in the post-reform system and by 80 percent in the pre-reform one. For every subsequent birth cohort the share of coverage from the new system is increased by 5 percentage points until those born in 1954, which are covered to 100 percent by the post-reform system.

Chosen excerpts by Job Market Monitor. Read the whole story at The recent rise of labour force participation of older workers in Sweden – IFAU

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