EUROPEAN PAPERS ON THE NEW WELFARE

Active Ageing: the EU Policy Response to the Challenge of Population Ageing

6.2 Mandatory Retirement (MR): A Critical Review

The current EU reform on pensions can be characterised as a parametric-style reform, that is, an attempt to rationalize the pension system by seeking more revenues and reducing the expenditure. The PAYG pillar is downsized by rising the retirement age (WB, 2001). But what is needed is paradigmatic-style of reforms, that is, there is the need to introduce a deep change in the fundamentals of pension provision, that is, the removal of the MR ages at EU level. The question of MR ages raises important legal issues (human rights considerations) is based on economic fallacies and is rejected overwhelmingly by the public opinion.

a) MR ages raise important human rights considerations
Mandatory retirement (MR) occurs when, as a result of a policy or contractual provision, an employer terminates the contract of an employee on reaching a specified age (usually the 65th birthday). Recital 14 of the “Directive on Equal Treatment” (2000/78/EC) states that it is ‘without prejudice to national provisions governing retirement ages’, the meaning of this is unclear, but appears to confirm that state-imposed retirement ages related to pension provision are exempt from the reach of the Directive’s age provisions, (O’Cinneide, 2005). Therefore, the current EU law allows the MR which have the following consequences: first, depending on the MR in various countries (which varies from 57.7 years old (Malta) to 65 (UK)) the people over the age cap do not receive the normal protection of the law against age discrimination in employment. Second, the employers are permitted to dismiss on the grounds of age employees who have reached the MR age, and third they lose the right to challenge before the courts the acts of unfair dismissal from the employers. But keeping MR is questionable on the following legal accounts:
• MR denies the older people Equal Protection under law
The provisions for MR — by giving rights to employers over the over 65s — deny older people equal protection and equal treatment under the law (Oxford Institute of Ageing, 2006). Therefore, they overshadow the concern with the interests and rights of the individual citizens in respect of non-discriminatory practices and full citizenship (Leeson, 2006). This also prevents disadvantaged age groups from participating fully in the labour market and social life (O’Cinneide, 2005).
• MR violates the right to work of the older people
It is the right to work beyond the MR age that is violated here, just as it is the right to employment at the earlier ages that is being protected in the substance of the EU Directive and Implementing Acts of member states (Oxford Institute on Ageing, 2006). Therefore what matters here is not just that older people up to MR age, should have the same employment rights and opportunities as younger people but they should also have the right to work longer than the current laws permit at the moment, that is as long as they want and are able to.
• MR is not in conformity with the major international human rights acts
Access to work for both young and old is necessary to allow individuals to realize themselves through their work and to participate in society. This is reflected in the major HR instruments1 which recognize the central importance of the right to work and the non-discrimination (O’Cinneide, 2005). Even though recital 4 of the Directive list these Instruments, the subsequent provisions which allow the member states to keep the MR ages in place are not in conformity with these International Conventions.
• MR does not meet the ‘proportionality test’ under the Directive
Article 6(1) of the Directive lists a number of legitimate aims to permit employers in certain circumstances to be able to regulate the timing of retirement of the older workers. Under the Directive MR meets the ‘proportionality test’ only when it cannot be replaced with alternative or less restrictive methods to achieve the legitimate aims. But it is contestable if MR is the least restrictive method of achieving the goals in question (O’Cinneide, 2005). Under the Directive, the use of age limits should only be permitted where the individual assessment is impracticable. But the individual assessment of the employees, i.e. the ability to learn, experience, skills, willingness to work may be ascertained by normal vetting procedures, individual assessment, (O’Cinneide, 2005). Therefore, given that individual assessment is possible, the use of general age limits (MR ages) cannot meet the ‘proportionality test’ even under the Directive.
• Employment rights
The denial or restriction of employment rights to workers above a particular age also raises serious questions under the Directive as this constitutes Direct Age Discrimination which again requires objective justification. Depriving older workers of their employment rights is disproportionate and unnecessary. This logic appears convincing: it is difficult to see why an employee can legally continue to work beyond their pension age but is denied the right to challenge acts of unfair dismissal and other abuses of employment rights (O’Cinneide, 2005, 44). With the introduction of age discrimination legislation, it may be increasingly difficult to argue that the disadvantages and the discrimination younger and older workers face, requires a restriction of their employment rights, as proper framing and enforcement of the legislation should be the appropriate tool for combating this discrimination, rather than reducing the rights of those affected (O’Cinneide, 2005). Therefore, older workers should continue to have full employment protection beyond the age of 65 (Tackling Age Discrimination, 2005).
• MR is discrimination based on Ages
It has long been held that forced loss of employment under the circumstances of the MR ages constitutes discrimination based on age. In Canada the Supreme Court in the McKinney case (1990) (two dissenting justices) assessed that MR is discriminatory:
– MR infringes the basic right of people to be assessed on their individual merits and performance rather than on the extrinsic characteristic of their age;
– MR is not unlike employment discrimination based on sex and race (Kesselman, 2004).
To sum up, the Directive and the legislation of the Member states that allow MR, writes off the employees as incapable and unworthy of respect or consideration for employment on reaching 65 years of age (Sheppard, 2006). MR also denies equal opportunity to the older workers, encourages the unfound ageism, stereotyping and stigmatizing of the elderly.
b. The economics of MR
The only potential legitimate defense of the MR (in the EU as elsewhere) is that the practice serves some valuable economic functions and that the banning of the practice would be excessively costly. Thus, the crux of the argument over MR, both legally and in public policy-terms, is whether the practice has sufficient economic benefits for society to override the human rights impact? Many scholars have carried out studies of the economic aspects of the mandatory retirement and their findings are highly critical of the traditional economic perspective on MR (Kesselman, 2004).
In support of MR have been the economic arguments brought by three main protagonists: Unions, employers, economists. But, there is a widespread literature which argues that their arguments either are myths (not supported by facts) or are based on economic fallacies. Moreover, the 18-year experience of the USA shows that we have not suffered any of the negative consequences that had been predicted by proponents of MR, (Kesselman, 2004).
• Unions fears
Unions have traditionally support MR for several reasons. One of the key reasons why trade unions often support MR is that they are concerned that employers can put pressure on the people to continue working when they would really prefer to retire (Meadows, 2003). Moreover, the Unions are worried that if MR is abolished, both private and public pensions will be undermined, (Gunderson 2004). If a person is entitled to continue working beyond 65, Unions suggest, employers and governments will feel less pressure to maintain these plans (Kesselman, 2004).
But in practice this has not been the experience of jurisdictions where MR has been abolished. Abolishing MR would allow individuals to continue working, thus, increasing their tax payments, reducing their demands on the public purse and actually relieving the fiscal pressure for curbing public pensions.
Another concern expressed by the Unions is that abolishing MR would reduce the jobs available for younger workers increase their unemployment and slow down their opportunities for promotion. But even this ‘job for youth’ argument is not supported by evidence. The studies of such bans find that the impacts on youth unemployment and job prospects for non-elderly workers are trivial and that the ‘job for youth’ is a myth based on faulty assumptions ( www.abilitynotage.ca , 2006). Some studies have looked at these issues in the USA and they could find no evidence that the subsequent abolition of MR in 1986 changed promotion practices (Meadows, 2003). The direct evidence against this is the fact that the countries (mostly EC/EU countries) that encouraged people to retire early during the 1980s and 1990s have not had lower unemployment rates and higher employment among the younger peoples than those that encouraged older people to remain at work (Meadows, 2003). The economy with the largest job growth for young people (USA, thirty millions new jobs from 1970 to 1990) is the same one with the largest growth in employment among the over 65s (Meadows, 2003).
In addition, in the years ahead the declining working force will become a constraint on economic growth, so that banning MR will improve the prospects for the economy as well as for individual older workers.
• Employers fears
Many Employers have expressed concerns about a prospective ban of MR. They hold, among other things, that first, the older workers are a burden on payrolls, costing more than they are able to produce, and that second, MR is necessary for employers to plan their staffing needs. Therefore, based on these reasons, they use MR as a convenient tool for weeding out the older workers (Harper et al. 2006). But employers’ arguments are myths rather than fact.
The ‘productivity myth’ is based on the faulty assumption that work is tied to physical strength and endurance. Today almost 80% of jobs are in service sector and the largest rate of job growth is in the ‘knowledge-intensive’ industries. Empirical studies find no overall declines in average productivity of workers with age. Thus, there are studies which show that “… it is not until the 80s are reached that the average older adult will fall below the middle range of performance for young adults…” (Sheppard referring to the studies of Dr. Schaie, 2005). This conclusion has, of course, been the rationale for largely abandoning MR in the US (Sheppard, 2006). Therefore, most jobs can be done as effectively by a 70-year old as by a 35-year old (Meadows, 2003). Many of the older workers possess experience, skills, knowledge and networks that younger workers cannot replace (Kesselman, 2004).
The ‘planning myth’ is also based on the faulty assumption that employees spend their whole working life with one employer. Today, the labour market is dynamic and employees will change their employers a number of times during their working lives. As a result, employers no longer deal with static models of staffing and must deal with employees coming and going for all sorts reasons, including retirement. Therefore, the elimination of MR will only slightly complicate human resource planning.
Therefore, it makes little sense and it is wasteful for the economy to forgo the skills of those who would like to continue working beyond 65 at the same time as life spans have been rising, the health status of the older people improving and the physical demands of most jobs falling. In the future the ability of the business and public employers to expand and prosper will become increasingly dependent on their ability to hold onto their workers for more years (Kesselman, 2004). Therefore, smart employers should attract older workers because in the light of the shrinking workforce older workers have the potential to be the major drivers of the of the EU labour force in the future.
• Economic Model of MR
The economists have also entered the fray by devising a formal model in which MR serves economic functions. The basic idea of the economic model is that workers and their employers enter into voluntary agreements that fix the retirement age. This provision is assumed to facilitate a process called ‘deferred compensation’ in which workers are paid less than their productivity in their earlier years and more than their productivity in their later years. It is stated that this arrangement reduces the employer’s cost of monitoring workers and gives enhanced incentives for training workers. The connection between these economic benefits and MR is the fact that workers might choose to work longer than optimal during the period of excess compensation. The proponents of the model assert that the workers would work ‘forever’ without MR. The economic model is intellectually interesting one, but many of its key assumption are disconnected from the reality and are questionable:
First, the assumption of consensual agreement is flawed for those worker who would like to work beyond the stipulated retirement age (Kesselman, 2004). The model asserts that the employers honor their obligations towards the employees deriving from these agreements and that keep the relationship between employers and employees. But the evidence from the US demonstrates just the opposite, that is, the obligations of these consensual agreements are unilaterally violated by the employers, as long as MR is in place. The evidence from the US demonstrates that legislation that removed MR has strengthened (not weakened) the relationship between employees and employers because workers in career jobs have low pay relative to productivity when younger, and are rewarded for loyalty with higher pay when older. Therefore, outlawing age discrimination, that is, MR prevents employers from reneging on the second half of this compact (Hornstein, 2001).
Second, the model further assumes that workers have perfect foresight about their tastes and needs throughout their lives. In fact many workers will discover while they grow older that their health, family and financial situation have changed often in ways that would make them work longer than they had anticipated when they were younger.
Third, the model asserts that without MR there would be significant economic costs if deferred compensation is weakened. In fact none of these adverse effects have been observed in the countries that have banned MR and various forms of ‘deferred compensation’ have continued to flourish (Kesselman, 2004) and what is more the workers do not choose to work ‘forever’ even without MR.
Fourth, another defect of the economic model of MR is its failure to recognize how individual workers decide when to retire. The Model ignores the differences across workers that cause differences in their choice of retirement date. Through a process of self-selection more productive older workers will tend to choose later retirement while less productive workers choose early retirement. Hence, those workers who choose to continue on the job longer may not be overpaid relative to their productivity (Kesselman, 2004).
To sum up, no economic purpose is served by MR, certainly nothing sufficiently compelling to override individual worker’s right to be assessed on the basis of their own abilities and performance, not by an extrinsic attribute such as their age.
c. The majority of the worldwide population is against MR
In 2004 and 2005 HSBC conducted worldwide surveys of public opinion and the study revealed a resounding global rejection of MR ages. The study found that 72% (2005 survey) 80% (2004 survey) of the tens of thousands of individuals responding were opposed to MR (HSBC, 2005). The research has also revealed a strong and universal support for the idea that the people’s desire and ability to work should determine when they retire. Therefore, people sustain to abolish completely the retirement on the grounds of age criteria and to introduce the two other criteria the desire and the ability to work of the persons since these two factors and not age should be decisive (HSBC, 2006).
In addition to HSBC, the Global Commission on Ageing, based on the results of its surveys across the globe, adds another authoritative voice to sustain the elimination of the retirement ages and argues that we have outlived the utility of this concept (Global Commission, 2006).
The result of these global surveys which reject MR based on age can be interpreted under another important political perspective: the results serve to reject as unfounded both the hitherto literature and the policy-maker justification that the removal of MR are a politically risky reform. On the contrary, if in a democracy the decisions are taken when sustained by the majority, this means that the pension reform and the removal of MR is not politically risky but is politically sustainable and a very democratic one. Therefore, if the EU policy-makers do not act in conformity with the will of the majority of their citizens to ban the MR, then give empirical evidence to literature of the political economy which sustain that in Europe the “pension policy have never been very democratic” (World Bank, 2001, referring to Nye, 1990).
To sum up the critique to MRs, the evidence that is currently available does not support the argument that it is essential to continue to allow MR. Numerous authoritative scholars, panelists (Shepard, 2006; Gunderson, 2004; Kesselman, 2004) and think tanks (Global Commission on Ageing, 2006; www.compas.ca , 2005; www.abilitynotage.ca , 2006; HSBC, 2006) reject the reason for keeping MR and embrace the commonly held reason for terminating MR. It is argued that first, MR discriminates against asset-poor employees; second, it is outdated in a society where people live longer; third, it undermines equality and democracy, and fourth it weakens our economy (www.compas.ca, 2005).
Therefore, in the interest of certainty and economic productivity, MR should be abolished in EU as has been done in other Western countries (USA, Canada, Australia) considering the following factors:
– demographic: it is outdated in a society where people live longer and do less physical labour than in the past (www.compas.ca);
– workforce shortages: MR does not prevent skills and labour force shortages and ‘brain drain’ (Sheppard, 2006; Harper et al. 2006);
– human rights: MR denies older people equal protection and treatment under law and permits direct discrimination based on age (Oxford Institute of Ageing, 2006; Kesselman, 2004);
– economic theories: there are no good economic reasons to retain MR in place for the economy at large (Kesselman, 2004),
– social justice: MR harms those poor groups who need to continue working (Meadwos 2003),
– public opinion: there is a global rejection of MR ages (HSBC, 2006; Global Commission on Ageing, 2006).

1 Article 26 of the UN International Covenant on Civil and Political Right, requires equal treatment and protection against age discrimination. The UN Covenant on Social, Economic and Cultural Rights guarantees the right to work (Arti.6). The importance of these principles in the context of age equality was emphasized in the UN International Plan of Action on Ageing (1982), the UN principle for older persons (1991) and the ILO Discrimination (Employment and Occupation) Convention (ILO 111).


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