Part-Time Pensions and Part-Time Work in Sweden

4. Effects of a part-time pension system on labour supply, employment, and number of hours worked
If everyone had continued to work until 65 years of age, the introduction of a part-time pension system would have reduced the labour supply if measured by the number of hours worked. However, it is more complicated than that. Many people leave the labour force before the normal retirement age. Some do so early but many do so when they are 60-65 years old. in the same age span it was possible to get a part-time pension (in 1994 the lower age limit was raised to 61 years). It is not unlikely that the part-time pension leads to people continuing to work more years than if they had not had that option. In that case we will get two effects going in the opposite directions.
The discussion on the partial effects of the part-time pension system has had both a medical and an economic basis. It is possible to combine the two types of analysis.
The starting point for the medical analysis is that there is a change in the work capacity with age. Research in this field indicates that the maximum capacity in many cases is the same well above the age of 60, but that the ability to work at maximum capacity for an extended period of the day or week may be lower for older people than for younger ones. If the work is organized in a way that it requires use of the maximum capacity during a large part of the workday it may lead to problems for older workers. A negative solution, at least from the point of view of increasing labour supply, is that older workers leave the labour force with a disability pension or with other forms of economic support. A more positive solution is to adjust work tasks, work speed and working hours according to age. One example is a change from full-time to part-time work. An indication that people could continue to work if the working conditions were adjusted is given by the results of Statistics Sweden’s survey of work environment. See Table 2. The answers in the table indicate that a shorter work-week is only one of several possible ways of changing the working conditions8.

Table 2: Possibilities of being able to work until the ordinary retirement age among people aged 50-64 years
Source: Statistics Sweden (2004), The Work Environment 2003.

There are arguments in favour of adjusting the working conditions for older workers, but why are these adjustments not taking place? Employees and employers could agree on reduced working hours for example. One explanation may be that there are economic arguments on the local level favouring other types of solutions.
A reduction in working hours which is combined with a part-time old age pension from the social security pension scheme means a reduction in the pension paid out both before and after the take up of the pension. More important is probably that the collectively bargained occupational pensions boost the effects to a high extent. The explanation is that the compensation in the social security pension scheme for income parts over the ceiling is based on the earnings in the years immediately before retirement9. For example, a change to half-time work means that the basis for that pension is drastically reduced and the pension will be much lower10. A disability pension is economically a much better alternative. The take-up of a disability pension means that the old age pension from the social security and occupational pension systems will not be reduced, and also in most cases to a higher compensation before 65. Other forms of early exit from the labour market that build on different forms of compensation may also be economically attractive. An alternative would be if the employer could offer half-time pensions instead of full-time pensions when reducing personnel and maybe also in other instances. There may be some complications for the employer. More people have to leave to get the same reduction in hours worked and it could lead to problems with organizing work. To make solutions attractive the collectively bargained occupation pension schemes have to be adjusted.

• The first effect is the effect we started with. Some people who would have continued to work up to the ordinary retirement age will accept the offer of a part-time pension. The income loss for the individual is compensated by more leisure time. The importance of the replacement rate may be seen by the large changes in new pensions following changes in the replacement rate.
• The other effect is also mentioned earlier in the paper: If the opportunity arises to get a part-time pension, some people will take that pension instead of leaving the labour market with a disability pension or another form of early exit compensation. The alternative part-time pension and early exit with compensation in one or another form may not be exactly coordinated in time. For example, a person may abstain from applying for a disability pension at age 60, if he knows that he may be able to get a part-time pension at age 61 (may be encouraged to continue to work full-time when the part-time pension option is close in time). A person may also abstain from applying for a disability pension at the age of 62 if he has been part-time pensioned at the age of 61 (the part-time pension may make it attractive to continue to work).
• A third effect of the part-time pension system is that it can influence labour force participation both directly and indirectly (through the labour supply decision). Part-time work may lead to a better health condition for example (compared to full-time work and maybe also compared to full-time leisure). Absence due to sickness (with sickness benefits) may therefore be lower and perhaps also the number of people who later apply for a disability pension. It may lead to a positive effect for the number of hours worked in the economy.
The conclusion of this discussion is that the total effect of the introduction of a part-time pension on labour supply is uncertain. There are different effects that work in different directions. Empirical studies are necessary to say if the total effect is positive or negative. They are not easy to carry out as the labour supply and changes in labour supply are influenced by many other things than the introduction of a part-time pension system. We shall try to answer the question in several different ways. First we will discuss in general terms how part-time work and labour force participation are related to each other. After that we will discuss some experiences from countries other than Sweden. In the next step we try to estimate the effects by making use of existing studies and data from the National Insurance Board.
8 A comparison of the work environment studies of 2001 and 2003 shows that the share of those who believe that it will not be possible to work until ordinary retirement age in the present occupation declined to a great extent between 2001 and 2003.
9 The pension for earnings over the ceiling in the social insurance system depends in the occupational pension system for those in the state sector on the earnings in the five years before the retirement age, for those employed in the counties and municipalities on the best five of the last seven years before retirement, and for white-collar workers in the private sector on the earnings in the year before retirement.
10 For another example of the possibility that pension schemes may hinder part-time work see Even and Macpherson (2004).

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