Flexible Retirement in Europe

1. Introduction

The pensions systems of the enlarged Europe are gradually adapting their individual features to the requirements imposed by population ageing in a situation in which their financial sustainability is coming under ever increasing pressure. One of the main means by which this objective can be attained is the raising of the retirement age. In this regard almost all the recent pension reforms reflect the will to increase incentives for postponing retirement and for encouraging working lives to continue to an older age.
The introduction of the element of flexibility — besides meeting the demand for greater personal choice — has a place among the tools aimed at raising the average retiring age. In every European country pension systems allow some margin of manoeuvrability to those who wish to anticipate or delay their exit from the world of work and opt for a different retirement age from the established norm for ‘legal’ retirement.
Clearly, however, the very fact that reference is often made to a legal retirement age shows how rigidity prevails over flexibility in relation to the time and manner of retirement, though in this regard many changes have taken place over the last decade.
Almost everywhere in fact there are now early retirement schemes which reward shortened careers or offer easy conditions in the cases of disability and unemployment, except for those countries such as Denmark, the Netherlands, Ireland and the United Kingdom where the pension benefit is flat rate, i.e. it is not proportionate to salaries or contributions, but rather to the length of the contribution period or residence in the country.
However real, true flexibility is not limited to this. On the contrary, it involves qualitatively different characteristics. In the next sections we will try to describe what flexible retirement consists of, what its characteristics are and its micro and macroeconomic implications in the European legislative landscape.
A part of section 3, directed at the current regulatory situation in Europe, will be devoted to the Italian case, setting out the evolution of the actions taken in the last decade, in the course of which some flexibility elements have been restricted and others have not found a concrete application.

2. Conceptual Framework and General Characteristics

In view of the notable variation in planning and applying measures aimed at introducing elements of flexibility into the European pensions systems, we will begin with an examination of their features from a general point of view, and not linger over national specifics. In the next section we will go on to a short review of the state of the art at European level.
Individual national situations apart, flexibility in retirement consists in allowing an individual worker the opportunity to choose both when to start receiving the pension and how much of it to receive in proportion to the whole pension benefit due to him, and finally how to receive it, deciding for example between a lump sum or an annuity, and if the latter between a fixed income or one that grows in real terms.
In order to avoid replication of pre-retirement types that would inevitably be burdensome for the system, all these elements of choice must be accompanied by the worker being made responsible through actuarial correction mechanisms for the benefits. Consequently individual social security wealth (SSW)1 must be independent as much from the moment in which retirement occurs as from the manner in which the social security wealth is gradually received. This implies actuarially neutral corrections to pension benefits.
However, it should be remembered that complete flexibility is not possible and perhaps not even desirable. In compulsory systems, such as the European ones, all three aspects (when, how much, and how) are clearly delimitated, for example regarding the age at which it is possible to gain access. It is common practice to consider flexibility in time of retirement and the amount of pension received as two2 clearly distinct measures, i.e. ‘flexibility of the retirement age’ and ‘partial retirement’, thus making the link between them less clear3. In reality they are two sides of the same coin which could eventually be integrated.
However flexible the methods of retirement may be, the moment at which one begins to receive a pension income must necessarily be confined within a limited age range. This is also for reasons of fairness, as will be seen later. In some cases, however, it has been decided to set only a minimum wage, either leaving the workers completely free to postpone retirement, as happens in Poland and Lithuania, or introducing disincentives which in practice penalise continued working activity beyond a certain age, as used to happen in Finland before the 2005 reform.
As already shown, flexibility also partly consists of the possibility of receiving part of the pension at the same time as a reduced earned income resulting from a part time activity. The total of the pension is usually inversely proportional to the number of hours worked or directly linked to earned income lost because of a reduction in hours. Even where this relationship is not proportional, e.g. in France, the worker can still choose, within various time ranges, how long to devote to work and how long to free time. As in the case of flexibility in relation to age, the possibility of gradual retirement is usually confined to a determined age range.
The extension of possibilities of choice linked to retirement age sits fairly naturally alongside notional defined contribution (NDC) systems, as in fact occurs in Sweden, Lithuania and Poland, and as established by the Dini act in Italy. However, a certain freedom of choice is adopted in many cases even in ‘defined benefit’ systems, with corrections in benefits directed at actuarial neutrality very like those applied to DC systems.
Real flexibility implies an actuarial neutral approach, i.e. a calculation which neither penalises nor grants unearned benefits on the change of retirement age, ceteris paribus. For example, social security wealth being equal, in the case of retirement later than the basic age, the pension benefit will be relatively greater as a result both of the extra contributions and the shorter time span to which the pension will correspond. In this sense, in order to safeguard the social security wealth accumulated by the worker, the amount of the pension depends not only on the parameters set by the system for the calculation of the pension benefit, such as contributions, last years’ salaries, contributory seniority, etc., but also on actuarial factors which can reward to a greater or lesser degree, the choice to postpone retirement, and vice versa, can penalise to greater or lesser degree, the decision to bring it forward.

Elsa Fornero: Center for Research on Pensions and Welfare Policies (CeRP) and Università degli Studi di Torino.
Chiara Monticone: Center for Research on Pensions and Welfare Policies (CeRP), . Thanks to Serena Trucchi and Michele Belloni for their collaboration to this research on legislative and bibliographic sources.
1 Social security wealth for a worker at age a who claims his first pension benefit at age A is defined as the current value of future pension benefits less the current value of contributions to be paid into the pension scheme before retirement:

where a is the age of the worker at the moment in which social security wealth is calculated, P.i4 is the pension which will be paid at the end of every year, to the worker who has retired from age A for the remainder of his life, T is the maximum age, c, represents the contributions paid at age j, η; is the probability of being alive at age i, conditioned to be alive at age A (taking as certain life at working age) (Ferraresi and Fornero, 2000).
2 The possibility of combining pension and remuneration for work with unlimited income constitutes an ever more widespread element of flexibility. However it won’t be dealt with here.
3 An example of the distinction between the various measure concerning flexibility can be found in the MISSOC table (European Commission, 2006a).

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