Why is the Employment Rate of Older Swiss so High? An Analysis of the Social Security System

Population ageing, better health of older persons, and lower birth rates will, in the near future, have a significant effect on the workings of labour markets in virtually all industrialized countries. There are three main reasons for this observation. First, these developments will inevitably change the age composition of the labour supply: the proportion of older workers in the labour market will increase. A second implication of the changing demographic structure is the negative effect that this development has on (primarily unfunded) public pension systems. Most pension funds in many industrialized countries are already confronted with severe financial difficulties, and innovative solutions for assuring future pensions are called for. Finally, the ongoing demographic change will, with the current retirement age, significantly reduce the labour supply. Furthermore, this reduction in labour supply cannot be compensated for by capital accumulation (e.g. Börsch-Supan, 2001).
The changing composition of the labour force, the financial problems of unfunded pension systems, and the reduction of the total labour supply will inevitably have two related consequences. The first is that there will be a certain amount of pressure to increase the official retirement age. Thus, for Switzerland, the OECD recommends that the official retirement age be gradually increased to 67 years of age for both men and women. The second consequence is that training of older workers, i.e. the upgrading of their job skills and the related increase in supply of vocational and on-the-job training, will gain importance (see OECD, 1998). In fact, and due to the changing composition of the labour force, this latter point is likely to gain in importance irrespective of whether or not the official retirement age is increased. According to the OECD, the training of adult workers will play an important role in assuring strong economic growth in the future.
Despite the need to increase the employment rate of older individuals, public policy in Switzerland (as in most European countries) has concentrated instead on propagating early retirement. There are a number of reasons for this emphasis on early retirement. First, overemployment in Switzerland is, in comparison to other European countries, remarkably high including among the older population (Sousa-Poza and Henneberger, 2002a).
This could be a result of the relatively long working hours or the high GDP per capita in Switzerland. Whatever the reason, such overemployment rates increased quite dramatically in the 1990s, which possibly gave rise to increased (partially involuntary) early retirement. A third potential reason is that actual retirement ages are high in comparison to other industrialized countries. Some politicians have argued that aligning the actual retirement age with that of neighbouring countries should be feasible.
As opposed to other European countries, the trend to early retirement in Switzerland has only really come about in the past decade. However, the results are quite impressive: whereas in 1991 about 20% of all men aged between 62 and 64 and all women aged between 59 and 61 took early retirement, this value had increased to about 30% by the year 2000.
Thus, at the moment, almost every third worker takes into early retirement. Nevertheless, Switzerland still has a high employment rate of older workers: whereas over 70% of all individuals between the ages of 55 and 65 are employed in Switzerland, the corresponding figure for Germany is a mere 38%. The values for the other countries bordering Switzerland are even lower (Figure 1).

Figure 1: Employment rate of individuals aged 55-64: average for the years 1996–2000
Source: OECD, Employment Outlook, several years.

It is generally accepted that the institutional framework plays a vital role in determining the employment rate of older workers. More specifically, the social security systems such as, for example, pension schemes, unemployment insurance, and invalidity insurance have in many countries evolved into institutions that strongly influence the retirement decision. This is primarily done by providing incentives for early retirement. Although other factors such as customs and economic conditions also influence the retirement decision, one can fairly say that the trend to early retirement in many European countries has primarily resulted from changes in the institutional framework.
The aim of this paper is to try to explain the high employment rate of older workers in Switzerland by taking a detailed look at the institutions that primarily (or potentially) could influence the retirement decision. The paper is structured as follows. Section 2 provides a general overview of the Swiss social security system. In section 3, the main systems that potentially could influence the retirement decision are discussed. These are old age insurance, the occupational benefit plan, invalidity insurance, and unemployment insurance. For each of these, the services, the funding, and the age-related aspects are discussed. Although the design of the Swiss social security system plays a decisive role in assuring the currently high employment rate of older workers, other reasons also exist. These are discussed in section 4. Section 5 concludes.

David Dorn and Alfonso Sousa-Poza University of St. Gallen: Research Institute for Labour Economics and Labour Law, University of St. Gallen, Switzerland (corresponding author: A. Sousa-Poza, e-mail: Republished from the Geneva papers on Risk and Insurance vol. 28, No. 4 (October 2003) 652-672. Extracts of this paper were presented at the conference ‘‘Work Beyond 60: Preparing for the Demographic Shock”, 6-7 March 2003 in Vienna, organized by The Geneva Association, The Club of Rome, and The Risk Institute. Extracts were also presented at the Bertelsmann Foundation conference ‘‘Strategien gegen den Fachkräftemangel’’ in Berlin, 2 July 2002, and at the Bertelsmann Foundation conference ‘‘Reformen zur Steigerung der Beschäftigungsfähigkeit älterer Arbeitskräfte’’ in Berlin, 26 October 2001. The authors would like to thank the participants as well as Jaap van Dam, Thomas Liebig, Fred Henneberger, and Geneviève Reday-Mulvey for their valuable comments and discussions. Alfonso Sousa-Poza would like to thank the Swiss National Science Foundation for financial assistance. The usual disclaimer applies.

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