Social Security Programs and Retirement around the World The Relationship to Youth Employment
edited by Jonathan Gruber and David A. Wise
University of Chicago Press, 2010
Cloth: 978-0-226-30948-4 | Electronic: 978-0-226-30950-7
DOI: 10.7208/chicago/9780226309507.001.0001


Many countries have social security systems that are currently financially unsustainable. Economists and policy makers have long studied this problem and identified two key causes. First, as declining birth rates raise the share of older persons in the population, the ratio of retirees to benefits-paying employees increases. Second, as falling mortality rates increase lifespans, retirees receive benefits for longer than in the past. Further exacerbating the situation, the provisions of social security programs often provide strong incentives to leave the labor force.
Social Security Programs and Retirement around the World offers comparative analysis from twelve countries and examines the issue of age in the labor force. A notable group of contributors analyzes the relationship between incentives to retire and the proportion of older persons in the workforce, the effects that reforming social security would have on the employment rates of older workers, and how extending labor force participation will affect program costs. Dispelling the myth that employing older workers takes jobs away from the young, this timely volume challenges a raft of existing assumptions about the relationship between old and young people in the workforce.


Jonathan Gruber is professor of economics at the Massachusetts Institute of Technology and director of the Program on Health Care at the National Bureau of Economic Research, where he is a research associate. David A. Wise is the John F. Stambaugh Professor of Political Economy at the Kennedy School of Government, Harvard University. He is area director of the Health and Retirement programs, director of the Program on the Economics of Aging, and a research associate at the NBER.



- Jonathan Gruber, Kevin Milligan, David A. Wise
DOI: 10.7208/chicago/9780226309507.003.0001
[older persons, retirees, work, claims, job opportunities, economies, labor force]
The number of older persons in any demographic group has increased very rapidly relative to the number of younger persons and this trend will continue. Thus, the proportion of retirees has increased relative to the number of employed persons who must pay for the benefits of those who are retired. It is now often claimed that these provisions were introduced to provide more jobs for the young, assuming that fewer older persons in the labor force would open up more job opportunities for the young. This chapter addresses the validity of such claims. It presents the results of analyses of the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. The proposition that more work by older persons reduces the job opportunities for younger persons is put forth in many different forms. It is sometimes referred to by economists as the “lump of labor” theory. It states that if an additional older worker is employed, one younger worker must be displaced. The implication is that economies are boxed and that the box cannot be enlarged. (pages 1 - 46)
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- Alain Jousten, Mathieu Lefèbvre, Sergio Perelman, Pierre Pestieau
DOI: 10.7208/chicago/9780226309507.003.0002
[employment, youth unemployment, labor market, early retirement, market outcomes]
This chapter aims to derive a conclusive answer on the often cited potential for substitutability of employment of the old with that of the younger age groups. It provides some institutional background on the systems and regimes applicable to the older workers, as well as some specificity applicable to the young and describes the most important social protection schemes that provide for some form of replacement income when retiring from the labor market and when young and inactive. The nature of youth unemployment in Belgium is such that it is pretty insensitive to variations in labor demand, but rather it is the result of structural weaknesses in the areas of education, unemployment insurance, and wage formation. Furthermore, this chapter estimates the effect of incentive variables on activity rates, and documents the overall weak impact of parameters regarding the old on behavior of the young and shows that labor outcomes by gender have been slightly different over the period but they do not turn into different results than those obtained with aggregate labor market outcomes. (pages 47 - 76)
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- Michael Baker, Jonathan Gruber, Kevin Milligan
DOI: 10.7208/chicago/9780226309507.003.0003
[labor market, youth, elderly labor, ages, policy actions, Canada]
The importance of labor market considerations in the public debate about public pensions has varied tremendously through time. One of the most important changes has been in the age composition. This change has been driven partially by demographics as the baby boom generation pushed its way through youth and middle age; and now approaches traditional retirement ages. The development of public pensions in Canada can be divided into five distinct eras, each with its own social concerns, policy debates, and policy actions. On the production side of the economy, younger and older workers can in theory be either substitutes or complements. For example, if there are important gains from sharing knowledge, training, or combining experience levels to produce output, then older and younger workers may be complements. On the other hand, if there is little substantive difference between workers of different ages, then older and younger workers may be substitutes. (pages 77 - 98)
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- Paul Bingley, Nabanita Datta Gupta, Peder J. Pedersen
DOI: 10.7208/chicago/9780226309507.003.0004
[Denmark, Danish economy, retirement, youth, employment]
The demographic prospects in Denmark are characterized by an increasing share of elderly people, that is until the middle of the century. A major part of the trend toward earlier retirement is, apart from the impact from higher incomes and wealth, explained by the introduction of programs for early retirement, either directly or by expanding other retirement programs with an early retirement option, intended to reduce youth unemployment and increase welfare for eligible older workers retiring through these programs. The purpose of this chapter is to study the eventual evidence for or against this substitution hypothesis over the thirty years up to the turn of the century, using micro data for employment, unemployment, and enrollment in education for different age groups in the Danish economy. The regression results suggest that if anything, young workers are complements for the elderly in Denmark because youth employment tends to rise and fall together with elderly employment. For prime age workers, on the other hand, both employment and unemployment tend to rise with elderly employment, but this is most likely driven by the secular increase in female labor force participation over the period, bringing more prime aged workers into the labor market. (pages 99 - 118)
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- Melika Ben Salem, Didier Blanchet, Antoine Bozio, Muriel Roger
DOI: 10.7208/chicago/9780226309507.003.0005
[labor market, retirement policies, employment rates, unemployment, young]
One of the justifications provided for early retirement policies in developed countries is the idea that such policies can facilitate access to the labor market for younger people and help lower global unemployment. This chapter aims to study the long-term relationship between labor force participation (LFP) of the old and unemployment of the young. Employment rates for all age groups are influenced by general labor market conditions and this leads to spurious correlation due to a simultaneity issue. Concerning the evolution of opinions on the retirement/labor market relationship, the idea that Malthusian policies are an efficient answer to labor market disequilibrium has significantly lost ground. This applies both to early retirement policies and to other Malthusian policies such as working time reduction. Establishing a causal relationship of the reduction of labor force participation of the old on employment prospects of the young is indeed challenging work. (pages 119 - 146)
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- Axel Börsch-Supan, Reinhold Schnabel
DOI: 10.7208/chicago/9780226309507.003.0006
[retirement policy, Germany, employment, young, labor, early retirement]
Early retirement in Germany is very costly and amplifies the burden that the German public pension system has to carry due to population aging. The fundamental decision to adjust the length of working life to the increased total life span has been confronted with the argument that raising the retirement age would lead to higher unemployment among the young, and it continues to be watered down. This chapter presents the relationship between retirement policy and employment of the young. It shows that the German data provide no evidence for the belief that older workers take jobs away from the young and uses various pension design changes in Germany as instruments to identify how higher or lower employment of older individuals has affected the employment of the young. Most of the coefficients indicate a positive relationship. Adding controls to the specification reduces the effects of elderly employment in general. Since costs for early retirement increase total labor compensation of the young, thus making their labor more expensive, it should not come as a surprise that early retirement for the old causes less employment of the young. (pages 147 - 166)
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- Agar Brugiavini, Franco Peracchi
DOI: 10.7208/chicago/9780226309507.003.0007
[life expectancy, youth unemployment, retirement, young workers, social security]
The dramatic increase in life expectancy at older ages and the trend toward earlier withdrawal from the labor force are changing the age composition of the labor force in many European countries. This chapter addresses whether early exit prompted reductions in the youth unemployment rate, as is often claimed by union leaders, thus partly compensating for the welfare redistribution operated in favor of the elderly. This question necessarily relates to the labor market policies enacted during the last decades and the impact that these had on the participation rate of younger workers. The interaction of these policies and the social security legislation helps in shaping the age profile of the labor market and the trends in labor force participation. The Italian labor market is characterized by relatively high unemployment rates, particularly for the young. The two main characteristics of the youth unemployment rate in Italy are an extraordinary regional variability and a high percentage of first-job seekers among the unemployed young, particularly in the southern regions. The variables capturing the inducement to retire have a significant effect on the labor force participation of older workers. This effect has the expected sign and is very robust to different specifications, suggesting that Italian workers responded to social security incentives. (pages 167 - 216)
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- Takashi Oshio, Satoshi Shimizutani, Akiko Sato Oishi
DOI: 10.7208/chicago/9780226309507.003.0008
[population, aging, employment policies, labor force, young, social security]
The rapid pace of population aging has raised concerns about the sustainability of the current programs and stimulated a series of major pension reforms since the mid-1980s, which called for a rise of eligibility ages, a reduction of benefit levels, and a rise of contribution rates. These reforms are likely to have affected the labor supply of the elderly and possibly of the nonelderly. This chapter examines whether social security programs in Japan induce withdrawal of the elderly from the labor force and create jobs for the young and provides a historical overview of social security reforms and employment policies toward the elderly. It presents the long-term employment and unemployment trends of both the old and the young and performs a regression analysis to examine the direct relationship between the employment of the young and that of the old. Changes in social security programs associated with the employment of the young or the old are analyzed using measures for the inducement to retire. The findings confirm that there is no serious trade-off between the old and the young in the labor force. (pages 217 - 242)
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- Arie Kapteyn, Klaas de Vos, Adriaan Kalwij
DOI: 10.7208/chicago/9780226309507.003.0009
[employment, young, retirement programs, labor force, unemployment]
This chapter discusses one of the factors underlying the emergence of widespread early retirement opportunities: the desire to create or preserve jobs for the young. The labor force participation (LFP) of the (male) elderly shows a considerable decrease between the late seventies and late nineties, after which most early retirement programs were scaled down because they were fast becoming financially unsustainable, and the government finally appeared to succeed in effectively restricting access to unemployment and disability benefits. Some graphical evidences are presented on the relationship between employment and unemployment of the young and the labor force participation of the old. If early retirement of the elderly age group were to have a beneficial effect on the employment of the younger age group, then the effect of elderly employment on employment of younger age groups should be negative, while on unemployment it should be positive. When elderly employment decreases, employment of the young should increase, while unemployment should decrease. (pages 243 - 260)
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- Michele Boldrin, Pilar García-Gómez, Sergi Jiménez-Martín
DOI: 10.7208/chicago/9780226309507.003.0010
[social security, workforce, employment, young, Spain]
Spain has witnessed dramatic social, economic, and demographic changes. Life expectancy has increased substantially, and fertility rates have dropped to some of the lowest levels in the European Union (EU). Policies that favor early retirement are supported and promoted with the justification that they may induce a reduction in youth unemployment rates. The basic idea is that because jobs are a scarce resource available in a fixed number, retiring an older worker would free the same job for a younger, most likely unemployed, one. The goal of this chapter is to understand the relationship between the employment of the old and the employment/unemployment of the young. It estimates the statistical impact of the labor force participation (LFP) of the old on the employment/unemployment of the young, and also of the middle-aged individuals. There exists a positive relationship between the labor force participation of older workers and the employment rate of prime age individuals, while the association between unemployment and labor force participation is negative. (pages 261 - 294)
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- Mårten Palme, Ingemar Svensson
DOI: 10.7208/chicago/9780226309507.003.0011
[Sweden, social security, younger workers, economy, employment]
This chapter concerns the hypothesis that the increasing generosity of the social security system has decreased labor force participation among the elderly in Sweden and investigates whether labor force participation among older workers affects employment among younger workers. The idea that unemployment among younger people in a society could be counteracted by inducing exit from the labor market of older workers has been used as an argument for providing generous social security programs. The validity of the argument that retirement of older workers increases the possibilities for younger workers of finding a job depends critically on two factors. First is the substitutability between younger and older workers in the production process. If older workers are not fully replaceable by younger ones, it will counteract any effect on the unemployment rate of younger workers. Second, the retirement of older workers will decrease production in the economy. This will, in turn, decrease the overall demand in the economy and ultimately the demand for younger workers. (pages 295 - 318)
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- James Banks, Richard Blundell, Antoine Bozio, Carl Emmerson
DOI: 10.7208/chicago/9780226309507.003.0012
[United Kingdom, youth unemployment, early retirement, labor force, jobs]
This chapter sheds light on the importance of incentives to retire on older labor force supply in the United Kingdom over the last forty years and describes the reforms to pension system and early retirement schemes to assess in what respect are the changes in financial incentives exogenous from the labor market situation. The UK case is very interesting in that respect, as most of the pension reforms—and, arguably, all major reforms in the 1980s and 1990s—were motivated more by public finance considerations (both short and long run) than by unemployment. There are many debates concerning the relationship between the number of older and younger workers in the United Kingdom that have led to changes in policies to foster early exit of older workers. This chapter also contains descriptive figures comparing the labor force participation of older individuals in the United Kingdom with the evolution of employment for younger individuals as well as a cross-country comparison of the French and the UK experience. Job Release Scheme (JRS), the major UK early retirement scheme of the late 1970s and early 1980s, are detailed and estimations of what could be considered to be a “natural experiment” of specific incentives to encourage early retirement are presented. (pages 319 - 344)
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- Jonathan Gruber, Kevin Milligan
DOI: 10.7208/chicago/9780226309507.003.0013
[social security, unemployment, labor market, incentive index, survey]
The Social Security program has been the single biggest social insurance program in the United States for decades. This chapter opens up by documenting time series trends in labor supply by age group and then turns to a more formal regression analysis of those trends. It develops a measure of the variation over time in the incentives for retirement of the elderly and relates that to the labor supply of both the elderly and younger workers. The analysis of the labor market impacts of changing elderly labor force participation uses data from the nation's largest annual labor market survey, the Current Population Survey (CPS). The movements in elderly employment are negatively related to prime-aged employment. The positive relationship between the incentive index and unemployment—and the negative relationship of the index with employment—indicates that the incentive index is somewhat predictive of the labor market behavior of the elderly. (pages 345 - 360)
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Author Index

Subject Index