Phased retirement through flexible partial pensions

Mitarbeiter in diesem Projekt:

Among politicians, there is a degree of consensus that phased retirement should be facilitated – that is, employees should be enabled to withdraw from employment gradually through a progressive reduction of working hours, with the attendant loss of earnings compensated by a wage supplement. The best-known example of phased retirement is part-time employment prior to retirement. Under this model, employees reduce their working time to 50%, while the employer assumes an additional payment of at least 20% of the part-time wage as a supplement. Before 2010 and under certain conditions, the German Federal Employment Agency covered the 20% augmentation. The variant in which working hours are actually scaled back to 50% throughout the entire transition period is only seldom claimed. A much preferred alternative is the so-called block model whereby employees continue to work full-time for the first half of the transition period and then cut back to 0% for the second half. Another much less known phased retirement option is the so-called partial pension. Here, employees likewise reduce their working hours but receive a partial pension comprising two-thirds, a half or one-third of their old-age pension. Their earnings in addition to the partial pension must not exceed specific limits. This semi-retirement model is seldom if ever used, although it exhibits advantages over the part-time employment concept. This project sought to outline the different phased retirement options (early retirement, partial pension plus additional earnings, and part-time employment prior to retirement), then to compare them by means of diverse criteria, and ultimately to elaborate an appropriate reform proposal. Part-time employment prior to retirement, the partial pension, and early retirement were compared using the following criteria: gross income in the transition period, net income in the transition period (each assuming maximum additional earnings and a reduction of working hours to 50%), income after attainment of the age limit, as well as net present value both of pension incomes over the entire pension term and of total incomes. Reform measures and proposals are analyzed and assessed with the help of a wide array of MEA instruments (e.g. MEA-PENSIM, see Project 2.10.; and MEA-GKV-SIM, see project 2.14.). All in all, the comparison of the different phased retirement options shows that part-time employment prior to retirement does not present any great advantage from the point of view of the insured. This scheme's popularity, contrasted with the "wallflower existence" of partial pensions, is thus not to be explained from this angle. Rather, the part-time employment alternative is doubtless preferred because it can be structured as a block model and thus also does justice to employer interests, for example in facilitating manpower organization. For this reason, the block model is often offered as the sole variant of part-time employment prior to retirement. In addition, part-time employment arrangements are more attractive because they can already commence at the age of 55, whereas the partial pension cannot be claimed until early retirement is likewise permissible. As for income in the transition period, the partial pension model proves superior to the other gradual retirement options, in both gross and net terms. After retirement, the part-time employment scheme fares somewhat better than the partial pension model. Viewed over the entire period, there are scarcely any pension income differences between the given options. Only when taking additional account of earned income does part-time employment display slight advantages. The partial pension's disadvantage nevertheless lies in the complicated provisions governing caps on additional earnings and rigid partial pension levels. The latter entail marginal tax rates of far over 100% as soon as additional earnings exceed the cap specified for a particular level. This detracts from any incentive to increase work in the transition period prior to full retirement. MEA has therefore drafted a reform proposal for a "flexible partial pension". Under this model, the partial pension's disincentives are eliminated by removing its benefit levels and by introducing a "tariff" that guarantees a constant "pension withdrawal rate", meaning that a certain percentage of additional earnings is always left to the insured. Such a regulation is simple and calculable. In this way, partial pensions would gain more appeal, rendering part-time work prior to retirement obsolete, at least from the insured's point of view. A truly smooth transition to retirement could thus be achieved. Compared with this evolutionary approach towards a flexible partial pension, a more radical step would be to drastically raise or abolish caps on additional earnings prior to normal retirement, while scaling up pension reductions for early retirement to an incentive-neutral level. Such a measure would likewise foster genuine phased retirement, while making it possible to extend employment offers to early retirees in the absence of fixed caps on additional earnings. In the fall of 2011, the German Federal Ministry of Labor and Social Affairs submitted a proposal for a so-called combi pension which, just like the above recommendation for a flexible partial pension, amounts to a reform of the partial pension. Hence, our project remains up to speed. The study was published as MEA Discussion Paper No. 243-11; a slightly modified version was published in 2012 in the journal Sozialer Fortschritt.

Aus diesem Projekt hervorgegangene Publikationen:
  • Gasche, Martin (2012): Bonusrente statt Zuschussrente, Wirtschaftsdienst, 92. Jahrgang , Heft 9, , S. 605-612.

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