EUROPEAN PAPERS ON THE NEW WELFARE » Paper No. 1 / 2005

Abstract
One of the most important levers for making the healthcare system in Slovenia more efficient through the implementation of an urgent reform process in the near future is to use a services management approach — management as in a planning, organization, information and controlling system and a decision-making process in the proper choice of leadership for healthcare institutions. The different political options in Slovenia could change the orientations and the solutions concerning relations between public and private sector healthcare. The question of efficient leadership in healthcare institutions remains. Business and managerial functions are basic tools for harmonizing and for overcoming the problems among medical and business sectors in healthcare institutions such as hospitals and clinics.

Keywords: healthcare system, reform process, management.

1. Presentation of some basic problems

Citizens want to have access to a healthcare service whenever and wherever it is needed. Asked what the main weaknesses of Slovenian healthcare are, Slovenes put waiting times on top of the list (MZ, 2000). Bad organization of services comes second, and bad quality third. Slovenes are sensitive to the perceived differences in accessibility and want to know whether accessibility is truly determined solely by different health needs. They want higher quality healthcare services and access to information about good practices, positive models, problems and bottlenecks. They expect more sensitivity on the part of medical staff and greater involvement in decision-making about issues concerning their health and life.
Health workers have their expectations as well. It would be unjust to claim that these expectations solely concern their income. They wish to help their patients. They do not want to bear a responsibility that is not theirs, and they do not want to wonder in fear whether or not their patients will survive until the future date of an operation. They would like to offer citizens the best medical care that science and technology can provide. They want a stimulating working environment, opportunities for personal professional development and participation in decision-making while maintaining the autonomy of their profession. They want fair competition in their profession, and they want us to find a systematic way to eliminate the levelling of wages and to reward the quantity and quality of the work performed. They expect outdated hierarchies to be supplemented by teamwork.
The state is aware that it must be a good steward of the healthcare system, which was entrusted to the state by its real owners — the citizens. Stewardship means commitment and responsibility to the needs of citizens being met in the most efficient and high-quality manner. The aim of the state is better health for all citizens and a stable healthcare system. The state is aware that health must be preserved and strengthened not only as a fundamental human right, but also as support for the development of human potential.
Slovenia is distinctive among the transitional economies to the extent that it largely retained its basic values concerning health care in the first decade of its independence — that it did not allow money rather than health needs to open the door to the healthcare system. Its Constitution states that the right to social security includes a guarantee of access to health services for all without distinction in relation to personal circumstances including wealth. However, with the reform of the health system in 1993, we withdrew from some values, especially in terms of solidarity in healthcare financing. Some other values, which we would otherwise wish to strengthen, have not yet reached the levels of a just, social and effective state.
Administration and management of public healthcare institutions will more closely approximate those in public enterprises. Councils of healthcare institutions will be transformed into supervisory councils. In addition to supervision, they will also have a guiding role in strategy preparation. A management body will be established, whose members will be individually and collectively responsible to the supervisory council. Management on all levels will be evaluated on the basis of professional and financial results. Public healthcare institutions will be responsible for the overall treatment of patients from entry into the system because of a specific problem to the completion of treatment.

2. State stewardship of the healthcare system

Because of their close ties with people, their needs and expectations, healthcare systems are in most cases public systems. Health is the most important ingredient of national and individual well-being. In a way, it is ‘owned’ by individuals, as are the resources (financial as well as material and informational) intended for health. As people have difficulty in managing these resources individually, they have entrusted the state with the stewardship of the entire healthcare system. As stated above, stewardship of the healthcare system means commitment and the responsibility to the needs of citizens being met in the most efficient and high-quality manner. Primary responsibility for this stewardship, of course, lies with the Ministry of Health.
Growing demands for increased efficiency, quality and responsibility for the economic management of resources in the public sector in the last decade have, in European countries, given rise to a transfer of entrepreneurial methods, tools and activities into the public and non-profit sectors. Where the state used to participate in direct management of healthcare institutions, it withdrew from that form of management and retained only a regulative role — that of steering and directing the healthcare system. In the new spirit of stewardship, the state retained and strengthened its obligation to steer the healthcare system with the highest regard for ethics, quality and effectiveness. In this sense, state regulation can be understood as a kind of compromise between the rigid system of direct control and management of institutions by the state on the one hand, and the system of market competitiveness on the other.

Miroslav Končina: director, University Psychiatric Hospital, Ljubljana
Policy attitudes towards private health insurance also vary. Some governments do not see private health insurance as an important or desirable component of their health systems. Others consider it to be a pillar of the health system. Governments look to private health insurance to supplement public financing, or in some cases to replace it, for a variety of reasons. It may simply be a matter of finding an alternative source of financing to increase the capacity of the health system, or a means to achieve other health policy goals, such as greater individual responsibility for health-care funding.
Private health insurance can help governments attain health system performance goals, but can also put them at risk. The effect depends, in part, on the role of private health insurance, in terms of market size and function with respect to public systems. In countries where private health insurance plays a prominent role, it can be credited with injecting resources into health systems and helping to make them more responsive. However, it has also given rise to considerable equity and cost control challenges in most of those same countries.
This Policy Brief looks at trends in private health insurance in OECD countries and at the opportunities and challenges created by these markets. It also depicts useful practices that can help policy makers employ private resources to help them achieve health policy goals.

2. What is the role of private health insurance in OECD countries?

In the United States, the Netherlands and Germany, private health insurance is a source of primary coverage for population groups without access to public health cover. Under the US system, in which public coverage through Medicare and Medicaid is restricted to the elderly, disabled and certain poor groups, 72% of the population has some form of private health insurance. In the Netherlands, nearly a third of the population — those in the upper-income bracket — is excluded from publicly funded insurance; almost all of those excluded buy private primary coverage. Germany, on the other hand, is the only OECD country allowing individuals above an income threshold to opt out of social health insurance.
In Australia, Ireland, New Zealand and the United Kingdom, where privately funded providers operate in parallel to the public delivery system, private health insurance duplicates existing public universal coverage, offering a private alternative. Nearly half of the Australian and Irish populations purchase a private health insurance policy, making these the largest duplicate markets across the OECD.
Private health insurance also complements financing from public programmes in many OECD countries by covering cost-sharing under those arrangements.

Table 1: Population covered by private health insurance and by public coverage systems, 2000

Notes: Negligible indicates a proportion covered of less than 1%; n.a. indicates not available; (e) estimated.
Source: OECD (2004). Private Health Insurance in OECD countries.

This type of coverage predominates in France, where complementary insurance reaches over 90% of the population. In the United States, individuals eligible for Medicare can buy policies covering co-payments or other service gaps in the public programme.
Finally, in many OECD countries private health insurance supplements public systems by financing goods and services that are excluded from public coverage.
Private health insurance is purchased by 65% of the population in Canada, where the supplementary role is the sole permitted function of private health insurance in most provinces, while in the Netherlands nearly all of the population with social health insurance purchases supplementary insurance. In Switzerland, 80% of the population supplements basic mandatory health coverage with a voluntary private health insurance policy.

A project of gradual retirement in Croatia

Vladimir Miletic — Tue, 10 May 2005 14:28:28 +0000

1. Older workers and unemployed under strain

The situation in the Croatian economy is characterized by a GDP per capita of around 5000 to 6000 USD, modest economic growth of 4% per year, a large number (over one million) of retired people and an unemployment rate around 20%. In this environment the most vulnerable groups would appear to be the unemployed and retirees with low pensions. The government as well as many independent institutions and economists are proposing different plans and ideas, which would help speed up economic growth and improve living standards in the country. One such idea is the project of gradual retirement.

2. ‘Gradual retirement’ project

A group of independent experts, economists and lawyers, coordinated by Royal, a pension insurance company in Zagreb, Croatia, has been working for two years on the project of ‘Gradual Retirement instead of Early Retirement’. This project is inspired by the philosophy of the fourth pillar and tries to implement its ideas in the Croatian environment.
This project has taken into account all the circumstances mentioned above. The project aims to address the two most vulnerable groups of Croatian citizens. The basic idea, therefore was to diminish the number of people retiring early, with consequent lower pensions, and to open up possibilities for employing younger participants in the labour market.
The idea of promoting longer working life is quite new for the Croatian society, so the project would start with two smaller but significant groups within the population:
• firstly, employees who became entitled, or in some cases, forced to retire early, with pensions up to 20% less than full pensions, and
• secondly, employees who will soon become redundant, and thus unemployed.
The project offers employees who become entitled to take early retirement the following option: instead of going into early retirement, they should be encouraged to stay in service and work half the regular working hours, e.g. 20 instead of 40 hours a week. The term for this form of employment is ‘part-time work’.
The second group is made up of employees who will be redundant, and consequently unemployed, but need less than five years to meet the conditions for early retirement. As unemployed they have the right to the unemployment allowance and some additional help to cover overhead costs and some medical and similar costs. The project is trying to persuade employers, employees and the state alike to retain these people at work, always in the above-mentioned form, i.e. that they would work half the regular working hours, e.g. 20 instead of 40 hours a week. The term for this part of the project is ‘shortened working time’.
This project is not possible under the current provisions of the Croatian employment law. Therefore it is proposed that the legal changes, which would make this flexible part-time work possible, be introduced into the Croatian employment law. In the so called ‘part-time work’ the qualifying period for an employee would be calculated according to the working hours he/she effectively puts in this plan. According to the plan, an employee would be credited with a six-months period of contribution for one calendar year of work. On the other hand, in the ‘shortened working time’ part of the scheme an employee would be credited with a contribution period as if he/she had worked full time. The reason being that the second group is generally much younger and could lose much more from the qualifying period of contribution.

Vladimir Miletic: Metrokon, Zagreb

Basic factors of needed welfare policy supporting the counter-ageing society in the Czech Republic

Karel Zeman — Tue, 10 May 2005 01:30:21 +0000

Abstract
1. Demographic trends
2. Impact of population ageing on public spending
3. Employment perspectives and problems
4. Welfare system and competitiveness
The Czech economy faces increasingly tough international competition. The economy must bounce back. Our social security systems must stay functional and economically viable in an ageing society without placing impossible burdens on the next generation. The labour market must be made more flexible and obstacles to employment must be removed. Non-wage labour costs must remain at acceptable levels for both business and employees.
Action has to be taken as the basis for ensuring that our social security systems remain sustainable for boosting the economy and for creating the potential for the accelerating of future economic growth. The aim is to modernize the welfare system or social-market economic system.

1. Demographic trends

The demographic position of the Czech Republic is expected to change dramatically over the next few decades. A demographic projection of the Czech Statistical Office (2003)¹ highlights negative trends of an ageing population, i.e. reduction of the share of the young generation due to the past and present low birth rates and a growing number of seniors thanks to the extending average life expectancy.
From the static point of view, the current demographic situation is obviously the most favourable over the entire course of history backed up with demographic data. Under a new projection, the reaching of record level of the share of population in the age group 20-59 has been postponed to 2005 (see Table 1). This category includes numerically strong age groups born immediately after World War II as well as strong generations of the seventies and eighties. On the other hand, the numbers of young people are falling and numbers of 60-plus seniors are increasing.

Table 1 – Age distribution of the population in the Czech Republic (in per cent of total)

a Estimate
b Medium variant of projection: 2005-2050
Sources:
Demographic projection of the Czech Republic, published on June 11, 2004, Czech statistical Office, Prague. Czech Republic Macroeconomic Forecast, Ministry of Finance of the Czech Republic, July 2004, Prague.

From the dynamic point of view, we witness a beginning of population-ageing process, which will escalate at the end of this decade. The share of young-age categories will go on reducing. This results from the past and present extremely low birth rates related not only to a change in lifestyle but also to a very poor availability of housing for young families. On the other hand, the number and share of seniors in the population will grow thanks to the extending average life expectancy. Unfavourable development can be partly mediated but not solved by international migration with the Czech Republic becoming a target country. Demographic development represents a risk for the economy’s development in the medium and long run.
The population profile over time depends on assumptions about fertility, mortality and net immigration flows. In 2002, the Czech Republic reported a fertility rate of 1.17, the lowest among the OECD countries. Fertility is assumed to increase from 1.17 to 1.62 by 2050. Fertility rates lower than 2.0 imply a long-run decline in the total population³.
Life expectancy at birth, reflecting mortality over the whole lifespan of a particular cohort, is expected to increase for both males and females, but the increase is smaller for women than for men. Life expectancy for males is assumed to rise from 72.1 to 78.9 years and for females from 78.5 to 84.5 years.
Net immigration is difficult to predict, since it depends on the economic situation of the country, the situation on the labour market and immigration policy. The projection medium variant is based on the assumption of an active migration balance. Net immigration will add roughly 25,000 persons to the Czech population yearly during the entire period of medium variant of projection.

Karel Zeman: Institute of Integration of the Czech Republic into European and World Economy
baloun@vse.cz

The Double Helix of Learning and Work

Mircea Malitza — Tue, 10 May 2005 01:23:36 +0000

Two major tendencies, having high visibility and causing intense debate, have marked social developments over the past three decades. The first of these has been the emergence of the concept and practices of lifelong learning. The traditional conception and organization of education as a continuous block, ten to eighteen years in duration, situated at the beginning of life and institutionalized around schools and universities, is being replaced by a more flexible scheme, whereby formal schooling, as well as non-formal and informal education, extends over increasingly long periods. The focus has gradually shifted to learning. Equally, work is no longer perceived as an activity consigned to the continuous block of adult life, devoted to contractual employment for thirty or forty years in productive enterprises, administrative institutions, or services. Work itself has been divided into categories similar to the formal, non-formal, and informal triad, according to the nature of remuneration (monetarized, monetized, or non-monetized, see Giarini and Liedtke, Wie wir arbeiten werden, Hoffman und Campe, Hamburg, 1998). It has also been extended to become ‘lifelong work’.
Common or related pressures emerge from the underlying pattern of these two parallel schemes in education and employment. They have emerged in the process of a dramatic expansion of knowledge, unprecedented innovations in technology, and an accelerated pace of change. The factors that seemed to be able to maintain lifelong stability, both in learning and in work, proved to be valid only for brief periods of time. Adaptation and updating have become imperative.
The Information and Communication Technology (ICT) revolution has emerged as the single most important factor that, at the beginning of the Twenty-First Century, is replacing the old clichés with new images. A reference to ‘a person who learns’ is no longer evocative of a child sitting behind a desk in a classroom and using notebooks and pencils, but a person of any age using a computer. A reference to an employed person is no longer evocative of somebody in a workshop or an office, but of somebody, of any age, using a computer.
The computer, this common device, that goes on changing the basic data of the two essential life processes of learning and work, warrants the following questions: What stable form will it give to both of them after the current transition period? How will humankind learn and work in the Twenty-First Century?
The first remark to be made is that both processes are undergoing unordered, quantum, and incoherent changes. After so many decades of debate on what was called permanent education, then continuing education and finally lifelong education, one might have expected that the concept would be crystallized and generalized. Given the circumstances of recurrent employment crises that have been analyzed ad nauseam, one might have expected more articulate measures than the resulting ill-assorted attempts to reduce work hours and to delay the age of retirement. The reasons for all these delays and hesitations lie in the fact that both learning and work have long been regulated by conservative laws and institutions, with deep roots in established traditions. School has always been one of the most conservative of institutions, owing partly to the concern of given generations to hand down values and knowledge to the next generation. As far as work is concerned, it has been subject to evolving national legislation and international agreements reflecting the numerous changes in the relations between employers and employees. While the workers gained more rights, paid work still remained a fixed point of reference. In short, the two systems of learning and work are both characterized by rigidity and inflexibility. They are burdened with an abundance of detailed and often irrelevant regulations. They discourage innovation, and they are unfit to absorb and generalize creative experiments.
The second remark refers to the fact that both systems are dominated by an ossified vocation and a single training formula. The resulting product is the ‘one-dimensional man’ (Marcuse, in Maclntyre, 1970) who follows only one pre-established track in life. The school diploma contains, like a passport, indications regarding the nature and degree of a person’s educational training. This information automatically assigns him or her to the practice of a well-delimited profession in the sphere of work. The person is ineluctably condemned to seek employment only in the various branches of that profession. Advancement is possible only within that same profession, and his or her career ends abruptly at the age of retirement. This scenario remains almost constant, despite the impressive increase in average life expectancy. A Procrustean bed forces everyone to adjust to an immutable pattern and to sacrifice any ability that may go beyond the imposed limits.
The divorce between the professional certificate and the chosen profession becomes evident when people change directions at the critical point of passing from school to work. Engineers who learn and practice business management, medical school graduates who become researchers in biology, scholars in the humanities who switch to the software industry, computer scientists who become financiers, farmers who turn into ecologists — the examples are numberless. And what about the masses of people who become unemployed for the simple reason that their training has been made inadequate and obsolete by the advent of new technologies or more complex qualification requirements?
It is now obvious that the articulation between the two systems of learning and work does not operate properly. The costs are high. Young people have to re-enrol in totally different departments thus, practically speaking, losing four to five years of their lives. Adults are forced to start all over again, in mid-career. The cohorts of people who have become marginalized are expanding, and society is confronted with the problem of underprivileged categories and increasing poverty.

Mircea Malitza: President, The Black Sea University, Bucharest
This is an introduction to the book of the same title (by Mircea Malitza and Orio Giarini), published by UNESCO-CEPES, Bucharest, in 2003.

How to Reconcile employees’ interest with the increasing older workers employment policies

Martin Hutsebaut — Tue, 10 May 2005 01:13:24 +0000

1. Employment rates in Europe

The European trade union movement supports the ambitious targets set by the European Council in Lisbon (2000) and Stockholm (2001): increase of the general employment rate to 70% and of the employment rate of older workers (55 to 64) to 50% by 2010. This increase is crucial in order to ensure the sustainability of the pension system, whatever be their design.
As to the general employment rate in Europe (25) we reached 62.9% in 2003. That means that we are still 7% below the treshhold set in Lisbon. One of the reasons for this state of play is that economic growth in Europe is too low: 0.8% in 2003 as compared to 3.1% in the US. Employment growth in 2003 was almost static (0.2%) while the unemployment rate rose to 9.1% up from 8.8% in 2002. GDP growth for the enlarged EU is foreseen to rise to 2.0% in 2004 and to 2.4% in 2005.
For the European Trade Union Confederation (ETUC) a qualitative growth policy is a precondition reaching the targets set in Lisbon and Stockholm concerning employment in general and employment of older workers in particular. Also the sustainability of decent pensions — whatever be their design and type of financing — is dependent on a good economic performance by the European economy. Therefore the European Stability and Growth Pact needs urgent revision: it should ensure not only monetary stability but also economic growth.
As to the employment status of the over-55s it is also generally acknowledged that the employment rate in Europe in the 55-64 age group is unsatisfactory: with 40.2% in 2003 we are far away from the Stockholm target of 50% (by 2010). The situation at national level is quite different: Sweden realizes already 68.6% while Italy stands at 30.3%.
The average age of withdrawal from the labour market in Europe in 2003 was 60.4%. The Barcelona Council (2002) decided that by 2010 the average exit age should reach 65 years.
The ETUC has never accepted this situation as irreversible, in particular since the original social response (early withdrawal) to an economic problem (high youth unemployment) was subsequently diverted from its original objective, namely to create more employment opportunities for young workers. Indeed, very soon the social measure of early retirement was turned into a convenient tool for companies to get rid of older employees at a low cost at an ever earlier age.
Soon it became clear that this dumping of older workers also led to a waste of human, social and economic resources, depriving enterprises of valuable expertise and know-how and in fact of the ‘memory’ of the company. Numerous are the companies and even sectors who, soon after having laid off their older workers, were confronted with huge shortages of qualified workers and made great efforts to re-recruit the same people they had first excluded.
The ETUC cannot accept the systematic exclusion of older workers from the labour market but neither the European Commission’s radical stance on the general discouraging of early withdrawal from the labour market: for the ETUC early retirement scheme should remain available as instruments of last resort to alleviate painful industrial restructurings if no other jobs are available and also as an exit route for particular heavy or unhealthy jobs. In the whole discussion on activation of older workers the ETUC believes that before starting to discuss about the increase of the statutory retirement age as some governments and employers do, Europe should look for policies which allow and motivate men and women to remain active until they reach the normal statutory retirement age.
Can things be changed and the trend be reversed? The examples in several countries prove that reversing the trend is possible. The trend in the employment of older workers over the period 1998-2003 was most favourable in Finland (+13.4% points), Hungary (+11.6% p.), the Netherlands (+10.9% p.), France (+8.5% p.) and Denmark (+8.2% p.) as compared to +4.4% p. in EU 25. In Italy the performance was very weak (only +2.6% p.) and in Poland the trend was even negative: -5.2% p.

2. The way forward

The main policies used to maintain older workers in the labour market include:
• Removing incentives to early retirement and encouraging later retirement and flexible retirement;
• Legislation to counter age discrimination and awareness-raising campaigns among employers in view of changing attitudes;
• Guidance and training programmes regardless of age;
• Employment incentive schemes including active employment policies and special job offers for older workers.
Two other policy issues identified as being vital in an integrated approach to active strategies but rarely implemented are care infrastructures and working conditions. An in-depth analysis of these policy areas has taught that all the above-mentioned issues are of equal importance and that they are all multidimensional and complex in themselves. This makes the issue of active ageing even more challenging for policy makers.

Martin Hutsebaut: Administrative Manager, European Trade Union Institute, Brussels

Employment of Older Workers in the Netherlands: Recent Reforms

Geneviève Reday-Mulvey and Katalin Velladics — Tue, 10 May 2005 01:05:03 +0000

1. Introduction

Recent Dutch experience of employment for older workers differs significantly from that of other continental countries like France and Germany. In a nutshell, over the last 7 or 8 years, the Netherlands have been able to start reversing the early retirement trend and improving employment at end of career. As a result, the employment rate of 55-64-year-old Dutch workers increased from 30% in 1995 to 42% in 2002 (for men from 41% to 55% and for women from 18% to 29%), and the average age of exit from the labour force rose from around 60 years in 1995 to 62 years in 2002 (cf. EUROSTAT, 2004).
Broken down by age groups, the largest increase in labour force participation occurred among 55-59-year-olds. Beyond the age of 60, the participation rate decreases sharply, as fewer than two out of ten people aged 60-64 years are in work. By the time people reach the age of 65, hardly anyone has a paid job (5%). There are, however, large differences between older men and older women, regarding labour force participation. At the age of 55-59, some 72% of males work, whereas in the 60-64-year age group 27% of men still have a job. The corresponding figures for 55-59-year-old and 60-64-year-old females are 34% and 11%, respectively. Labour force statistics also show that, although older women have lower overall labour participation, their participation rates increase more quickly than those of men. Moreover, there is a clear generation effect in the likelihood of older women working. For younger generations it is far more acceptable and normal to have and remain in a paid job, not only after the birth of a child but also at higher ages (see European Employment Observatory Monthly Newsletter, No. 21).
The most important drivers of the increase in the labour force participation of older people in the Netherlands have been the following:
• Public and company measures reducing early exit and encouraging work at the age of 55-64;
• Promotion of part-time work for all workers at all ages;
• Shortage of qualified workers, already manifest in some areas such as education and health care. Recently, in these sectors, retired workers have returned to work with their level of (early) pension benefits not being reduced. In the health sector, for example, between 2001-2002, 25,000 workers were called back to work.
• Economic growth, the so-called ‘Dutch miracle’, which led to a high rate of employment growth. As labour supply did not keep up with labour demand, older workers were no longer seen as a threat for upwardly mobile youngsters, and employers were also less inclined to use exit routes for older workers (see van Dalen, H. and Henkens, K., 2002).
2. Public measures to promote the extension of working life

Major reforms were initiated around 1995 and accelerated under the second Kok government (1998-2002). To keep the pension scheme affordable and meet the rising costs of care, the Dutch government set — among others — the target of achieving an annual rise of 0.75 of a percentage point in the net participation rate of people aged 55-64 years from 1999 onwards. Efforts have been concentrating primarily on people from the 1945-1960 birth cohorts, who are still largely active on the labour market. To keep these people in work and to prevent them leaving the labour market are the key objectives. Against this background, the basic principles of the government’s efforts are as follows:
• To make it easier and more attractive for people to stay in work longer;
• To avoid forced early retirement where possible;
• Voluntary early retirement must remain an option, but its costs are to be borne individually rather than collectively;
• To encourage reintegration into the labour market.
In 2000, the Dutch government set up the Taskforce ‘Older People and Employment’ with the main aim of keeping people of over 55 in the workforce. The Taskforce was mandated to (i) bridge the gap between policy and practice; (ii) promote changes in attitudes; (iii) foster good practice. The Taskforce started work in June 2001 and presented a final report with recommendations for policy-making in December 2003. A government statement about longer working lives followed in May 2004 (see van der Heiden-Aantjes, L., 2004).

2.1 Public measures to reduce early exit

Changes in the early retirement scheme
Started in 1995, reform of the early retirement scheme (VUT — Vervroegde Uittreding) — previously very generous for wage earners and costly for the state — has been achieved through collective bargaining, with the aim of having the system financed from individual funding. This is a far-reaching reform substituting private responsibility for solidarity (pay-as-you-go financing).
Although there are numerous branch schemes, one general rule is that the withdrawal of a full pension is possible from the age of 60 given a minimum contributory period of 35 years. As a consequence of the reforms, the replacement rate was decreased from 80% to 70% of the previous wage. In addition, favourable tax treatment for early retirement schemes began to be phased out in 2003. By and large, the transition from pay-as-you-go early retirement schemes to funded pension and pre-pension schemes discourages early exit from the labour market and encourages working until the age of 65 years (the statutory retirement age for both men and women in the Netherlands) or even longer. Thus, for example, those working until 70 years can benefit from pensions equal to 100% of the latest gross wage.

This contribution is based on the section “The Netherlands – Encouraging Atypical Work” in the book: Reday-Mulvey, G. (2005): Working Beyond 60 – Key Policies and Practices in Europe, Palgrave, UK.
Geneviève Reday-Mulvey: The Geneva Association, Research on Social Security, Insurance and Employment – The Four Pillars, Geneva, Switzerland.
Katalin Velladics: Netherlands Interdisciplinary Demographic Institute (NIDI), The Hague, the Netherlands.

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

David Dorn and Alfonso Sousa-Poza — Mon, 09 May 2005 22:01:21 +0000

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: alfonso.sousa-poza@unisg.ch). 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.

Why and How to prolong working life: a labour market perspective

Paolo Sestito — Mon, 09 May 2005 21:31:32 +0000

Abstract
Using the Italian case as a learning example, this short note will discuss the issues raised by the goal of working life prolongment. Firstly, it will be argued that such a goal is of paramount relevance vis-à-vis the increase in life expectancy as a way-out from the apparent trade-off between financial sustainability and social adequacy of pensions systems. The difficulties of fulfilling such a goal, taking account of the interactions between demand and supply factors and of the inheritance of past rules and habits, will then be discussed with reference to the Italian case.
Section 1 will summarize the rationale behind working life prolongment. Section 2 will introduce the more difficult issue of how to realize it, showing the differences existing between cohorts and contexts as differentiated by labour market environmental conditions, normative rules inherited by the history and different chances of adjusting to possibly new rules. The need to look at the interaction between demand and supply factors will be stressed. Using the Italian case as an example, the following four sections will provide detailed arguments relating to these supply and demand interactions.

1. Why prolong working life

The basic arithmetics of life expectancy lengthening are quite simple. Faced with it, any society whatsoever has either to allow more resources to be spent upon retired persons — maintaining both historical retirement patterns and unitary pensions benefits — or to trade-off actual retirement age increases with cuts in unitary benefits in order to limit such an increased burden.
Such a basic fact remains true, although the details of these arithmetical realities may differ according to the pension system under consideration and the timing of these hard choices may differ according to detailed demographic factors.
Re. the latter, it is clear that countries which are going to experience a swelling in the numbers of the elderly because of a previous baby boom — such as Italy in the next 20-30 years as a result of the baby-boom of the late 1950s and early 1960s and the subsequent fertility fall — have more problems than others, particularly if migratory inflows are subdued and incapable of alleviating that temporary bulge. However, migratory inflows may not prevent the longer term implications of life expectancy lengthening¹. In addition, relinquishing fertility in order to acquire a more balanced population² evolution may not avoid the basic fact that, for any given individual, the lengthened life expectancy implies a longer retirement to working years ratio (for given retirement patterns).
Similarly, differences arise according to the details of the pension system. A pay-as-you-go (PAYG) system would require an increased contributory and tax burden. Some leeway may come from the possibility of depleting reserve funds accumulated in the past or from accumulating deficit for some years when a temporary swelling of the numbers of the elderly actually appears. However, the longer term arithmetical realities remain untouched by these financial tinkering exercises. In addition, a system based upon the financial returns of accumulated savings would still require more savings being accumulated and invested, amounting to an increased contributory burden. What differs is the possibility of investing those resources abroad, at the given international rate of return, so that the resources currently consumed by the elderly may actually be the counterpart of a trade deficit rather than claims upon the GDP.
In such a framework, paralleling the lengthened life expectancy with prolonging the working life provides a way out from the above-stated dilemmas. There would be less need to increase the burden upon current youths (or to accumulate funds for the future) and unitary benefits would not need to be reduced too much. Basically, financial sustainability and social adequacy of pensions entitlements (during retirement) would both be preserved.
It is impossible to state an optimal rule linking retirement and life expectancy since the optimal response of a (hypothetical) individual having to plan consumption and work over the whole life cycle would depend upon many details, including health related considerations, the amount of uncertainty (associated to the lengthened life expectancy), the access to financial markets and so on. Broadly speaking, it is likely that the increase in life expectancy would be used both to postpone retirement (i.e. an increase in life-time labour supply) and to spread consumption over the lengthened expected life (i.e. saving more while working, the equivalent of a rise in contributions, and consuming less while retired, the equivalent of a cut in benefits). However, even an apparently simple rule maintaining a constant working to retirement years ratio cannot be taken for granted, though as already said an optimal response to an increase in life expectancy would include a postponement in retirement. Therefore, a well designed pensions system should include mechanisms leading towards that: avoiding perverse incentives to early retirement as well as providing explicit obligations to work longer (obligations quite natural to the extent that some mandatory aspects are present in the system as a whole³). Managing such a system over time, therefore, involves mechanisms designed to progressively shift the retirement patterns over time.
In the Italian case, the above-stated arguments are directly visible through the lenses of the Notional Defined Contribution (NDC) system gradually phased in in accordance with the reform of the mid 1990s. In such a system⁴, pension unitary benefits are a function of total life time contributions⁵ multiplied by a transformation coefficient which is a decreasing function of age at retirement. These transformation coefficients are themselves periodically adjusted⁶ in order to take account of the actual changes in life expectancy⁷. Taking into account the likely evolution of these transformation coefficients, the NDC system would thus imply a declining trend in the replacement rate at given retirement patterns (see Figure 1). The only way-out from such a decline would be a sizable postponement of actual retirement, so that people would accumulate more contributions and so avoid the decline in the transformation coefficients applied to those accumulated contributions.

Fig. 1: Rates of replacement for public services with and without the effects of demographic correction

Paolo Sestito: Ministry of Labour and social Policies, Rome
1 At least insofar as migrants acquire natives’ demographic characteristics as far as life expectancy is concerned, social evolution is a gradual process and some actual ‘exploitation’ of their initially lower life expectancy may actually occur even if migrants rapidly acquire the same legal rights of the natives. However, such a ‘solution’ would be unfair and a signal of social and health policies’ failure.
2 Besides fertility rises have only very gradual effects against the prospect of a swelling in the numbers of the elderly.
3 The mandatory aspects of a pension system are relevant also in the case of a system based upon the financial returns of individually accumulated savings. The need to accumulate funds and the investment in annuities from the returns accruing from them should be mandatory, the justification for this being the need to tackle the risk of imprudent behaviour. For very similar reasons, minimum age eligibility standards may also be fixed when the individual would bear the financial costs associated with early retirement using actuarial adjustment rules. In a defined benefit system, these minimum age eligibility standards may also be necessary in order to prevent individuals from exploiting the system because of the lack of actuarial adjustment rules. Note that the relevant issue refers to the rules governing benefits determination, i.e. whether the system is of a defined contribution (DC) or of a defined benefit (DB) type, regardless of its fully funded versus PAYG nature.
4 For a succint description of its features, see Marano and Sestito (2005).
5 It would amount to a given percentage of total earnings and accumulated over time according to a notional rate of return which is a function of a moving average of nominal GDP growth rates.
6 It is envisaged that the adjustment would take place at ten-year intervals. The distinct steps implied by this are a source of inequities — as adjacent cohorts are treated in rather different ways — and inefficiencies — as retirement decisions may be affected by the anticipation of the distinct adjustments to come. Moreover, the adjustment itself, while being required by law, is not automatic, as a consensual procedure is envisaged for it and an explicit political endorsement has to be given, meaning that there is a risk that the adjustment could be either postponed or held back. Actually, a very important political test is going to take place in 2005, as the first of these adjustments should be made then.
7 It is the average life expectancy which matters regardless of sex, and the risk of leaving survivors is also taken into account. The lack of differentiation gives an advantage to the healthier and the longer-living. This favours women and, to the extent that they are more long-living, the rich as well. The possible perverse distribution implications have not been well studied so far. However, it should be noted that the previous defined benefit system, besides giving an implied advantage to more long-lived people, also favoured those with steeper earnings careers, who are on average those with higher incomes. On the issue of longevity risk and benefits design, see Diamond (2005) and Fornero and Sestito (2005).