Ten Misconceptions related to Retirement at the Age of 67

Mannheim, 2010. The increase of the statutory retirement age to 67 years is one of several reforms which aim at stabilizing the public pension insurance. Despite a continuous rise in life expectancy, which strongly suggests the extension of the employment period, this increase in the retirement age is highly unpopular. Mostly, it seems to be due to various misconceptions attached to it.

Martin Gasche, Tabea Bucher-Koenen, Annette Holthausen and Sebastian Kluth have illustrated ten key misconceptions attached to this issue.

Misconception no. 1: The increase of the statutory retirement age applies to everyone
The change in retirement age will not come into effect immediately, but rather it will increase gradually, beginning in 2012. From then on, the retirement age will rise stepwise over a time span of 17 years. Consequently, this reform will only fully impact those who are 47 years old or younger today. Moreover, an exemption clause enables insured, who have contributed to the pension scheme for 45 years or more, to retire at the age of 65 without any deduction.

Misconception no. 2: Pensioners will lose two years of pension payment
As life expectancy increases faster than the statutory retirement age, retirees, on average, will receive their pension payment over a longer time period than before, despite a later retirement. According to conservative forecasts life expectancy will have increased by more than three years in 2029, therefore, given an increase of the retirement age by two years, the average period of pension payments will still rise by more than one year.

Misconception no. 3: The increase of the statutory retirement age will not lead to a relevant reduction of the contribution rate of the public pension insurance
Compared to the status quo, an increase in retirement age as stated above will enable a reduction of the contribution rate of the public pension insurances between 0.5 and 0.8 percentage points by 2030. By 2050, this decline that will be allowed by that reform will rise to one percentage point. Certainly, this is a moderate effect. Nevertheless, it is quite noteworthy considering the contribution rate has a similarly negative effect on employment, like a tax on wages.

Misconception no. 4: An increase of the retirement age should not only be introduced in order to achieve a (small) decrease of the contribution rate
Apart from impacting the statutory pension insurance, an increase in the retirement age also has additional positive effects on the labour market, because a later retirement leads to an increase of the labour force. Depending on the assumptions made regarding the labour-force participation rate of elder people, employment due to the increase of the retirement age as explained may increase by 1 million to 1.7 million people until 2030. An increase in gainful employment, again, affects economic growth positively, and increases fiscal revenue as well as the revenues of other social security benefits offices. In the statutory pension insurance, as we have seen, the contribution rate can be decreased by 0.5 to 1.0 percentage points by 2030 solely because of retirement at the age of 67. This is due to the fact that the working population has on average a higher income and therefore pays higher contributions than retirees.

Misconception no. 5: This reform is a pension cutting program
This argument assumes that insured persons do not change their personal retirement age and retire at the same point in time as they would have done in the old scheme, accepting the associated deductions. However, this view is invalidated by the fact that an extension of the employment period leads to additional pension entitlements. Having paid contributions over a longer period of time, in turn the monthly pension will be increased.

Misconception no. 6: The statutory pension age should only be raised after the employment rate of older people has increased
This statement confuses cause and effect. A rise of the statutory retirement age causes an increase in the employment rate of older employees and not the other way round.
Over the last ten years, the employment of over 60-year-olds has already increased significantly - also because of retirement age increases (retirement age of women and unemployed) and the introduction of deductions in case of early retirement. The persistent below-average employment rate of older employees is not only due to physical impairments and inferior employment opportunities of older people, as has been frequently suggested in the current debate. In fact, it is highly dependent on regulations such as partial retirement, which facilitate an early retirement.

Misconception no. 7: The old are taking away the jobs of the young
Firstly, as a consequence of the demographic change, the number of people at employable age will decrease in the future and, therefore, labour supply will decrease as well, despite the effects of an increased retirement age demonstrated above.
Moreover, the above fear of elderly is completely unnecessary, because this argument is based on the wrong assumption that labour demand is constant and has to be distributed across those wanting to work. However, this is not the case. Additional work also provides additional income. And a certain part of this additional income will be consumed, leading to an increased demand for goods and services. As a result, the demand for labour increases as well, because a greater workforce is needed in order to provide the demanded goods and services. Hence, more employment leads to an even greater increase in the demand for labour.

Misconception no 8: Elderly are not able to work any longer, because of health reasons
As explained above, the increased retirement age does not fully come into effect before 2029. Therefore it is not the physical condition of today's employees but that of future ones, which is relevant. Firstly, the average physical condition of older employees in 2029 will have increased significantly compared to today. Moreover, employment in industries which worsen the state of health, as for example the civil-engineering sector, will decrease in the future. Nevertheless, company- and sector-specific solutions to compensate health impairments of older employees might turn out to be reasonable.

Misconception no. 9: Older employees are less productive
The productivity of an employee depends both on his physical and cognitive abilities as well as his experience. In old age, cognitive and physical abilities tend to decrease, while experience based performance rises. Consequently, the productivity of older employees is not necessarily lower than the productivity of the young. The right mixture in terms of age may even increase the productivity in a team, because each worker can benefit from the strengths of their older or younger colleagues. Age-related differences can be used particularly in team-work and, given an appropriate composition, may even lead to an increase in productivity.

Misconception no. 10: As well-being increases with retirement, an early retirement will be better
It is in no way proven that people always feel better as soon as they stop working and enter retirement. Studies on the influence of retirement on physical and mental health as well as mortality expectations come to different results. To this day, it remains ambiguous whether the changes brought about by retirement have a positive or negative impact on the well-being of the person affected.


Further Information
Zehn Missverständnisse im Zusammenhang mit der Rente mit 67
MEA Discussion Paper 209-10 Gasche, Martin; Bucher-Koenen, Tabea; Holthausen, Annette; Kluth, Sebastian
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