oversight

Older Workers: Policies of Other Nations to Increase Labor Force Participation

Published by the Government Accountability Office on 2003-02-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Ranking Minority
                Member, Special Committee on Aging,
                U.S. Senate


February 2003
                OLDER WORKERS

                Policies of Other
                Nations to Increase
                Labor Force
                Participation




GAO-03-307
                                               February 2003


                                               OLDER WORKERS

                                               Policies of Other Nations to Increase
Highlights of GAO-03-307, a report to the      Labor Force Participation
Ranking Minority Member, Special
Committee on Aging, United States
Senate




In recent years, the challenges of             The retirement policy reforms in Japan, Sweden, and the United Kingdom
aging populations have become a                are expected to lead to higher labor force participation of older workers.
topic of increasing concern to the
developed nations. These                       •       Japan is facing the most severe aging trend of the nations GAO studied,
challenges range from the fiscal
imbalance in national pension
                                                       as its median population age is projected to be 28 percent higher than
systems caused by fewer workers                        the United States in the coming decades. In response, Japan has enacted
having to provide benefits for                         substantial benefit cuts to its national pension system by raising the
greater numbers of retirees, to                        eligibility age and reducing benefit levels to maintain fund solvency. Due
potential economic strains due to                      to these changes, some Japanese workers will have to work to later ages.
shortages of skilled workers. Part             •       Sweden undertook the most significant reform by changing the structure
of the solution to these challenges                    of its national pension system from a traditional pay-as-you-go defined
could be greater older worker labor                    benefit plan, like the U.S. Social Security program, to a system where
force participation.                                   participants’ benefits are more in line with their contributions. These
                                                       reforms are expected to extend workers’ careers by rewarding longer
GAO identified three nations–                          labor force participation with higher benefits. The system also
Japan, Sweden, and the United
Kingdom--that had displayed high
                                                       incorporates flexibility by automatically adjusting benefits to changes in
levels of older worker labor force                     the economy and life expectancy to preserve financial stability.
participation in the past and were             •       The United Kingdom will phase-in an increase in the women’s national
now implementing policy reforms                        pension eligibility age so that it will be equal to the higher male age of 65.
that continued to emphasize the                        It also revised its benefit formula to raise the annual incremental
importance of older workers. The                       increase for those who defer drawing their pension benefits. These
experiences of these nations                           changes either reward continued employment or discourage earlier
suggest that the nature of the                         retirement, and thus may promote continued labor force participation.
reforms, the public availability and
transparency of information on the             However, although incentives to work to later ages have been created
reforms, and the strength of the               through reforms to their national and employer provided pension systems,
national economy play key roles in
extending older worker labor force
                                               officials from each nation stressed that these policy changes must be
participation.                                 accompanied by labor market reforms and economic growth to provide job
                                               opportunities to older workers if they are to be effective.
                                               Labor Force Participation Rates for Men Age 50 to 64, 2000

                                               Percentage
                                               90

                                               80

                                               70

                                               60

                                               50

                                               40

                                               30

                                               20

www.gao.gov/cgi-bin/getrpt?GAO-03-307.         10

                                                   0
To view the full report, including the scope
                                                       Japan    Sweden        United        United
and methodology, click on the link above.                                    Kingdom        States
For more information, contact Barbara
Bovbjerg at (202) 512-7215 or                  Source: Economically Active Population 1950-2010, 4th Edition, Rev. 2, International Labour Organization, Geneva, 2002.
bovbjergb@gao.gov.
Contents


Letter                                                                                1
               Results in Brief                                                       2
               Background                                                             4
               Adverse Labor Force and Demographic Trends Less Pronounced in
                 the United States but Pose a Challenge                               9
               Key Elements of Reforms in Other Nations Expected to Increase
                 Labor Force Participation of Older Workers                         17
               Experiences of Other Nations Suggest That the Nature of Reforms
                 Plays a Key Role in Increasing Labor Force Participation of
                 Older Workers                                                      24
               Concluding Observations                                              25
               Agency Comments and Our Evaluation                                   27

Appendix I     Scope and Methodology                                                 29
               Analyzed Statistical Data                                            29
               Reviewed Literature and Conducted Interviews with Experts            29
               Conducted Site Visits in Three Foreign Countries                     30

Appendix II    Japan                                                                 31
               Japanese Pensions and Labor Market Policies                          31
               Old-Age and Disability Pensions                                      31
               Labor Market Policies                                                35

Appendix III   Sweden                                                                38
               Swedish Pensions and Labor Market Policies                           38
               Old-Age and Disability Pensions                                      38
               Labor Market Policies                                                42

Appendix IV    The United Kingdom                                                    46
               United Kingdom Pensions and Labor Market Policies                    46
               Old-Age and Disability Pensions                                      46
               Labor Market Policies                                                52

Appendix V     GAO Contacts and Staff Acknowledgments                                54
               GAO Contacts                                                         54
               Acknowledgments                                                      54




               Page i                                          GAO-03-307 Older Workers
Figures
          Figure1: Labor Force Participation Rates for Persons Age 50 to 64
                   in High-Income Nations, 2000 and 2010                                            11
          Figure 2: Labor Force Participation Rates for Persons Age 65+ in
                   High-Income Nations, 2000 and 2010                                               12
          Figure 3: Labor Force Participation Rates for Men Age 50-64 in
                   High-Income Nations, 1950 to 2010                                                13
          Figure 4: Labor Force Participation Rates for Women Age 50 to 64
                   in High-Income Nations, 1950 to 2010                                             14
          Figure 5: Median Age of the Population in High-Income Nations,
                   1980 to 2050                                                                     16
          Figure 6: Elderly Dependency Ratio in High-Income Nations, 1950
                   to 2050                                                                          17




          Abbreviations

          ADEA              Age Discrimination in Employment Act
          CPI               Consumer Price Index
          CSIS              Center for Strategic and International Studies
          DI                Disability Insurance
          EPF               employee pension funds
          IB                Incapacity Benefit
          IVB               Invalidity Benefit
          ILO               International Labour Organization
          MIG               Minimum Income Guarantee
          NDC               notional defined contribution
          OECD              Organization for Economic Cooperation and Development
          PBGC              Pension Benefit Guaranty Corporation
          TQPP              tax-qualified pension plans



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          Page ii                                                        GAO-03-307 Older Workers
United States General Accounting Office
Washington, DC 20548




                                   February 13, 2003

                                   The Honorable John Breaux
                                   Ranking Minority Member
                                   Special Committee on Aging
                                   United States Senate

                                   Dear Senator Breaux:

                                   As is the case in developed nations around the world, the aging of the U.S.
                                   population will pose challenges to our national economy and retirement
                                   income programs. Organizations as diverse as the World Bank, the
                                   Organization for Economic Cooperation and Development (OECD), the
                                   United States Federal Reserve, and others have studied these challenges,
                                   which range from the growing fiscal pressures in national pension
                                   systems1 caused by fewer workers having to provide benefits for greater
                                   numbers of retirees, to potential economic strains due to shortages of
                                   skilled workers as they exit the labor force. Most of these organizations
                                   believe that greater labor force participation by older workers can be part
                                   of the solution to mitigate the adverse effects of aging populations.

                                   In light of the economic and labor force challenges posed by an aging
                                   population, you asked us to draw upon the experience of other high-
                                   income industrialized nations in examining the following questions: (1)
                                   How does the United States compare with other high-income nations with
                                   regard to recent and projected trends in key demographic and labor force
                                   characteristics? (2) How are recently enacted retirement policy reforms in
                                   high-income nations expected to affect the labor force participation rate of
                                   older workers?2 (3) What did these nations learn from enacting policies
                                   that may increase the labor force participation of older workers?




                                   1
                                    For this report, the term “national pension system” will be used when referring to
                                   “universal” government programs that provide retirement benefits to persons in nations
                                   other than the United States. The term “employer-provided pension” refers to retirement
                                   benefits businesses make available to their employees.
                                   2
                                    In this report, we define older workers as persons 50 years of age and older. In some
                                   cases, because of the limitations of available data, we analyze subgroups of older workers,
                                   for example, those 55 years of age and older.



                                   Page 1                                                          GAO-03-307 Older Workers
                   To answer these questions, we compiled and analyzed demographic and
                   labor force data from the OECD, the United Nations Population Division,
                   and the International Labour Organization (ILO), highlighting data from
                   the United States and seven other comparison OECD nations.3 In addition,
                   we consulted with individual experts in national pension policy and
                   conducted an extensive review of the international retirement literature.
                   On the basis of this preliminary research, we identified three nations—
                   Japan, Sweden, and the United Kingdom—that had displayed high levels of
                   older worker labor force participation in the past and were now
                   implementing policy reforms that continued to emphasize the importance
                   of older worker labor force participation. We then examined these nations’
                   pension systems—both national and employer-provided—and labor
                   market policies through interviews, literature reviews, and site visits. We
                   met with key government officials concerning pension and labor market
                   policy, representatives from employer organizations and labor unions, and
                   well-known scholars who have studied older worker issues in each nation.
                   We conducted our work between February 2002 and January 2003 in
                   accordance with generally accepted government auditing standards. For
                   more details on our scope and methodology, see appendix I. For more
                   details on the pension systems and labor market policies of our sample of
                   nations, see appendixes II to IV.


                   The recent and projected adverse labor force and demographic trends for
Results in Brief   most other high-income nations will be less pronounced in the United
                   States, but the aging of the population will still pose a challenge to
                   retirement income programs. Although U.S. labor force participation rates
                   for older workers are not as high as in previous decades, ILO data for 2000
                   show that they are higher than most other high-income nations. The
                   situation is similar for demographic trends. In 2000, for example, the
                   median age of the U.S. population was 36, which was slightly lower than
                   the other high-income nations we examined. However, by 2050 the
                   projected U.S. median age of 41 will be 10 or more years lower than the
                   median ages projected for four of the seven other comparison nations.
                   Relatively higher fertility and immigration rates are two factors
                   contributing to the comparatively slower aging of the U.S. population. The
                   United State’s lower median age contributes to an elderly dependency
                   ratio, the ratio of persons older than 60 to persons age 15-59, that will be



                   3
                    Besides the United States, the seven other nations highlighted are the remaining six of the
                   “G-7”—Canada, France, Germany, Italy, Japan, and the United Kingdom—and Sweden.




                   Page 2                                                          GAO-03-307 Older Workers
between 6 and 36 percentage points lower than that of the other
comparison nations by 2050. However, the U.S. ratio at that time will still
be almost double its rate in 2000, primarily due to the aging of the baby
boom generation.

The retirement policy reforms in some high-income nations are expected
to lead to higher labor force participation of older workers. National
pension reforms in Japan, Sweden, and the United Kingdom that increase
eligibility ages, reduce pension benefits, and increase benefits when
claimed at a later age may encourage or require older workers to remain in
the labor force longer. National and employer-provided pension reforms in
each nation have moved toward the adoption of defined contribution
features.4 Such changes may also tend to foster greater labor force
participation by older workers as the link between contributions and
retirement benefits is more transparent as benefits grow in line with
contributions and returns on account balances. In addition, two of these
nations have taken steps to reduce the use of disability insurance as a path
to early retirement by tightening the eligibility requirements for disability
pensions. Each of the three nations has begun to study or enact policies
that have the objective of reducing the barriers to employment at older
ages. Such reforms include loosening or eliminating mandatory retirement
age standards, encouraging the elimination of age discrimination in
employment, improving older worker training, providing employment
earnings incentives, and exploring quality-of-work life issues such as the
flexibility of work arrangements.

The experiences of other nations we studied suggest that the scope and
comprehensiveness of reforms, the transparency and availability of
information, and the strength of the economy play important roles in
encouraging labor force participation by older workers. Officials from
these nations agree that for reforms to be successful in increasing the
labor force participation of older workers, they should be comprehensive
in scope. This would suggest, for example, that any reforms in the national
pension systems be accompanied by reforms in the employer-provided
pension system, in related social insurance programs (such as disability
insurance) as well as in labor market policies. Such comprehensive reform
should also be complementary in nature, so for example, changes in labor


4
 Under a defined contribution plan, the retirement benefit is expressed as an account
balance for the individual employee. This balance results from contributions that the
employer, the worker, or both make, as well as from subsequent investment returns on the
assets in the account.




Page 3                                                       GAO-03-307 Older Workers
             market policies (such as prohibiting age discrimination in employment
             against older workers) would reinforce the purpose of national pension
             reforms that encourage older workers to work longer. There was also
             agreement that reforms directed at older workers cannot achieve their
             intended purpose unless workers can recognize and understand the
             incentives being provided. Reforms must, therefore, be transparent, and
             workers must receive information about the changes that is
             understandable and useful to permit workers to make knowledgeable
             decisions. Finally, officials from all the nations agreed that a strong
             national economy that provides employment opportunities for all workers
             was a key component for the success of reforms that can raise the labor
             force participation by older workers.


             The number of persons in the United States over age 55 will grow
Background   substantially over the next two decades. Due to the aging of the baby
             boom generation,5 older persons are becoming an increasingly significant
             proportion of all persons and workers. In 2002, the U.S. Census Bureau
             estimates that there were 61 million people over age 55 and their numbers
             are projected to grow to 103 million in 2025. This growth will increase the
             percentage of the population that is over 55 from 22 percent to 30 percent.

             This shift in population age will affect the composition of the labor force.
             The number of older workers in the United States is projected to grow
             substantially over the next two decades, and they will become an
             increasingly significant proportion of all workers. In June of 2002, there
             were 19.2 million workers over age 55 and their numbers are projected to
             increase to 31.8 million by 2015. This growth is projected to increase the
             percentage of the workforce that is over 55 from 14 percent in 2002 to
             nearly 20 percent in 2015.6

             The projected growth in the percentage of the labor force over 55 will
             occur among both men and women. This would shift an earlier trend
             among older men, whose labor force participation declined from the 1950s
             until the mid-1990s. Since the mid-1990s, labor force participation among
             older men has been relatively constant at 67 percent for men age 55 to 64


             5
             The baby boom generation is defined as all persons born between 1946 and 1964.
             6
              For a general discussion of these trends, see U.S. General Accounting Office Older
             Workers: Demographic Trends Pose Challenges for Employers and Workers, GAO-02-85
             (Washington, D.C.: Nov.16, 2001).




             Page 4                                                      GAO-03-307 Older Workers
and 17 percent for men age 65 and older. The Bureau of Labor Statistics
now projects these levels to rise to 69 percent and nearly 20 percent by
2015. The expected growth in labor force participation rates among older
women would continue the current long-term trends of increases in their
participation. For example, the percent of women age 55 to 64 in the labor
force has steadily increased since the mid-1980s, from 42 to 52 percent in
2000, while rates among women 65 and older have grown from 7 to 9
percent in 2000. BLS projects these numbers to increase to 61 percent and
10 percent by 2015.

There are many factors that influence a person’s decision to work at older
ages. One key factor is financial incentives created by the rules regarding
eligibility for benefits from the national pension system—Social Security
in the United States. The decision to continue working is primarily related
to the trade-off between earnings and leisure time. The availability of
Social Security benefits allows workers to substitute non-labor income for
their earnings and to enjoy more leisure. Depending on the eligibility rules
and schedule of benefits, it can be more or less advantageous for workers
to retire at an earlier age rather than to continue employment. The
eligibility age for full Social Security benefits is currently 65 years and 8
months and rising, with reduced benefits available at age 62.7 If a person
elects to start receiving benefits at age 62, 63, or 64, the total lifetime
benefits8 they receive will be roughly equivalent.9 Even though delaying
receipt of benefits for 1 year is on average “actuarially equivalent or
neutral,” data from the mid-1990s show that most people (60 percent) elect
to start benefits at age 62. These benefits can be reduced if the beneficiary
has earnings above the income threshold when they are age 62-64. There
are no earnings limitations on Social Security benefits above age 65.




7
 The full eligibility age (or normal retirement age) for Social Security benefits is being
raised from 65 to 67 from 2000 to 2022. The reduction for taking benefits at age 62 was 20
percent when the full eligibility age was 65. When the age increase to 67 is fully
implemented, the reduction will be 30 percent.
8
 P. Diamond and J. Gruber. “Social Security and Retirement in the United States,” Social
Security and Retirement Around the World (Chicago: University of Chicago Press, 1999).
9
 This calculation is based on living to average life expectancy. If the calculation is based
specifically on race or gender, the results may be different since life expectancy differs by
race and gender. For example, an African American male, who would be projected to have
a lower life expectancy relative to females, and males of other ethnicities, should take
benefits at the earliest possible age to maximize his total lifetime benefit.




Page 5                                                           GAO-03-307 Older Workers
Another important retirement incentive is eligibility for employer-provided
pension benefits.10 In the United States, about half of the labor force has
some type of employer-provided pension coverage.11 Employer-provided
pensions are customarily classified into two major categories: defined
benefit and defined contribution plans. A defined benefit plan promises a
retirement benefit amount that is usually expressed as an annual payment,
derived from a formula based on a worker’s years of employment,
earnings, or both.12 In the United States, benefits in defined benefit plans
are insured by the Pension Benefit Guaranty Corporation (PBGC). Under a
defined contribution plan, the retirement benefit is expressed as an
account balance for the individual employee.13 This balance results from
contributions that the employer, the worker, or both make, as well as from
subsequent investment returns on the assets in the account. Under a
defined contribution plan, retirement benefits are not guaranteed by the
PBGC, and employees bear the risks of investment.

As different types of pension plans, defined benefit and defined
contribution plans provide workers with different incentives for either
retiring or continuing work. Defined benefit plans often provide incentives
for early retirement because they often do not increase retirement benefits
in-line with additional years of work with the firm after the early
retirement age.14 Under defined contribution plans, benefits can continue
to increase, consistent with continued contributions and positive rates of
return on assets. Since workers’ accounts increase in size proportional to
the amounts that are contributed by them or by their employers, they do


10
 Employer-provided pensions outside of any mandatory or universal national pension
system comprise what is often called the system of occupational pensions. We use the term
employer-provided pensions when discussing occupational pension systems.
11
 See U.S. General Accounting Office, Pension Plans: Characteristics of Persons in the
Labor Force without Pension Coverage, GAO/HEHS-00-131 (Washington, D.C.: Aug. 22,
2000).
12
  For example, under a defined benefit plan with a final average pay formula, the retirement
benefit is a percentage of the participant’s final years of pay multiplied by his or her length
of service. Under defined benefit plans, contributions are co-mingled funds invested in a
pension trust on behalf of all participants, and plan trustees have fiduciary responsibilities
for all assets in the pension trust.
13
  An example of a defined contribution plan is the 401(k) plan, named for the section of the
Internal Revenue Code that sets out the tax preferences for such plans.
14
 The Employee Retirement and Income Security Act generally requires that tax-qualified
plans allow participants to retire with full benefits at no later than age 65. Many plans allow
normal retirement earlier than these limits.




Page 6                                                            GAO-03-307 Older Workers
not create incentives to retire based on the benefit formula.15 In the past, a
greater percentage of pension-plan participants were covered by defined
benefit plans. In 1998, according to the Employee Benefits Research
Institute, 20 percent of households had defined benefit coverage only; 57
percent had defined contribution coverage only; and 23 percent had both
types of coverage.

Health status and occupation are other important factors that influence
the decision to work at older ages.16 As people age, they tend to encounter
more health problems that make it more difficult to continue working.
Thus, jobs that are physically demanding, usually found in the blue-collar
and service sectors of the economy, can be difficult for many people to
perform at older ages. Moreover, health status and occupation are often
interrelated since health can be affected by work environment. Blue-collar
and service workers, such as construction workers and janitors, often face
physically demanding work environments that may affect their health
status; these consequently lead to health impairments that affect their
ability to work to older ages. Although this group continues to face
problems, there is evidence that the health of older persons generally is
improving. This suggests that, compared with previous generations,
today’s older age population has an increased capacity to work to older
ages.

Although the Age Discrimination in Employment Act (ADEA) protects
workers in the United States age 40 and older from employment
discrimination,17 labor force participation is not solely an older worker’s
decision, as there must also be a demand for their labor. Employers’
perceptions of older people may form barriers to older workers’ retaining


15
  However, though they are age-neutral with regard to the benefit formula in comparison to
defined benefit plans, defined contribution plans can still influence the retirement decision
through their effect on individual wealth. The investment performance of a workers’
account can have a large effect on the final pension benefit. High rates of return on an
account can lead to larger balances, permitting possible earlier retirement. The degree to
which this can occur is also a function of the individual’s allocation of portfolio assets. See
Are Older Workers Responding to the Bear Market? by Andrew D. Eschtruth and Jonathan
Gemus, September 2002. JTF No. 5, Center for Retirement Research, Boston College.
16
 Access to retiree health benefits is a factor influencing older workers’ retirement
decisions. GAO has reported that the availability of employer-sponsored health insurance
coverage for retirees under age 65 declined during the 1990’s. See Retiree Health
Insurance: Gaps in Coverage and Availability, GAO-02-178T (Washington, D.C.: Nov. 1,
2001).
17
 This includes the prohibition of most mandatory retirement policies.




Page 7                                                            GAO-03-307 Older Workers
their current jobs, finding new jobs if they are laid off, or re-entering the
labor force after retiring if their retirement income is inadequate. For
example, some employers believe that older workers have lower
productivity than younger workers, generate higher costs for employee
benefits such as health care and pensions, and represent higher costs for
recruitment and training since they have less potential time to recoup
these up front costs compared with a younger worker. Encountering these
obstacles could discourage older workers and influence their decision to
retire.

The labor force decisions of older persons are also influenced by the
availability of alternative employment arrangements. In the United States,
there has been interest among older workers who wish to work longer in
seeking employment arrangements that result in “phased retirement” or
“bridge employment.” Phased retirement usually refers to staying with a
career job on a part-time or part-year schedule while phasing out
employment over a number of years to complete retirement. Bridge
employment usually refers to leaving a career job and moving to part-time
work with another firm in the same or different industry, prior to complete
retirement. In the United States, nearly half of all workers age 55 to 65
utilize a bridge job before completely retiring.

Older Americans receive income through a variety of sources, with the
Social Security program constituting the largest share for most persons. In
2000, 90 percent of households with a person age 65 or older received
Social Security benefits. These benefits constitute more than 50 percent of
total income for 64 percent of these households. Social Security benefits,
on average, replace about 40 percent of a program-covered individual’s
pre-retirement income, if benefits are taken at age 62.18 Other major
sources of income for older Americans are asset income (received by 59
percent of households), retirement benefits other than Social Security (41
percent), and earnings (22 percent). Social Security represents 41 percent
of aggregate income, earnings represent 23 percent, retirement benefits
other than Social Security are 18 percent, and asset income is 17.5 percent.

In the United States, the Disability Insurance (DI) program provides
compensation for the reduced earnings for individuals who have worked



18
 Replacement rates from national pension systems in some other high-income nations are
substantially higher. For example, the replacement rate in Sweden is approximately 55 to
65 percent.




Page 8                                                        GAO-03-307 Older Workers
                      long enough and recently enough to become insured and have lost their
                      ability to work because of a severe, long-term disability. DI provides
                      benefits to persons who are not able to perform substantial gainful activity
                      due to a physical or mental impairment. DI is not a major source of income
                      for a significant portion of older persons in the United States. In 2000,
                      7 percent of the population age 50-59 received DI benefits.19


                      The recent and projected labor force participation and population aging
Adverse Labor Force   trends for most other high-income nations20 will be less pronounced in the
and Demographic       United States, but the aging of the population will nevertheless pose a
                      challenge to retirement income programs. ILO data for 2000 show that the
Trends Less           labor force participation rates for older U.S. workers, though not as high
Pronounced in the     as in previous decades, will be higher than in most other high-income
                      nations. It is expected that, because of higher fertility and immigration
United States but     rates, the U.S. population will also age more slowly than other high-
Pose a Challenge      income nations. However, even though the population of the United States
                      is not aging as rapidly as other countries, the old-age dependency ratio—
                      the number of people over the age of 60 for every 100 working age people
                      (ages 15-59)—is projected to rise from 19 in 2000 to 35 in 2050.21 This near
                      doubling of the old-age dependency ratio will strain the resources of
                      programs that pay for retirement.




                      19
                        We focus on the age range of 50-59 because DI benefits are automatically converted to
                      retired worker benefits at the normal retirement age (currently 65 and 8 months for people
                      reaching age 62 in 2003). New DI participation is discouraged at age 62-64 due to the
                      lengthy determination process that makes many people choose to take Social Security
                      retired worker benefits.
                      20
                        High-income nations refers to the 8 nations listed in footnote 3. These nations are
                      included in the 23 nations that the World Bank has designated as high-income. For a
                      complete listing of all 23 nations, see appendix I.
                      21
                       In the United States, the old-age dependency ratio is typically measured by comparing
                      persons over age 65 with persons 16-64. We presented data for persons over age 60
                      compared with persons age 15-59 because ILO makes these data available in these age
                      ranges.




                      Page 9                                                          GAO-03-307 Older Workers
Older Workers’ Labor        Even though the labor force participation of workers age 50 to 64 is
Force Participation         expected to decline in most high-income nations, including the United
Expected to Decline in      States, between 2000 and 2010 (see fig.1), the United States has and will
                            continue to have higher rates of labor force participation for older workers
Most High-Income Nations,   than most other high-income nations.22 In some high-income nations, such
although Rates Expected     as France, Germany, and Italy, about 2 to 4 percent of persons age 65 and
to Remain Relatively High   older participated in the labor force. In contrast, the labor force
in the United States        participation rate in 2000 among U.S. workers age 65 and over was
                            10 percent (see fig. 2), the second highest labor force participation rate
                            among key high-income nations and 1.4 percentage points higher than the
                            aggregate for all 23 nations the World Bank has designated as high-income.
                            Labor force participation among U.S. workers age 50-64 was 66 percent
                            (see fig. 1). This trails only Sweden’s (79 percent) and Japan’s (73 percent)
                            rates for this age group.23




                            22
                              We present ILO data because they are the only comparable available data on the high-
                            income nations. However, ILO projections differ from those conducted by BLS that actually
                            project increases in the labor force participation for older U.S. workers between the years
                            2000 and 2025. In both cases, the labor force participation for older workers in the United
                            States remains comparatively higher than many, though not all, other high-income nations.
                            23
                              Possible explanations for Japan’s and Sweden’s high older worker labor force
                            participation rates are both cultural and economic. Experts have told us that older people
                            in Japan attach a high value to work and making a contribution to society. One factor that
                            may have further influenced labor force participation rates of older workers in Japan is
                            that Japan only instituted a national pension system in the 1960s. The traditionally high
                            labor force participation rates for older workers in Sweden are seen to reflect the fact that
                            until the early 1990s, Sweden had very low unemployment rates for all workers. In addition,
                            Sweden has always had the same retirement age for men and women and includes older
                            workers in re-employment programs.




                            Page 10                                                         GAO-03-307 Older Workers
Figure1: Labor Force Participation Rates for Persons Age 50 to 64 in High-Income
Nations, 2000 and 2010


100 Percent




80




60




40




20




  0
      Aggregate Canada            France       Germany           Italy        Japan         Sweden          United        United
      for all 23                                                                                            Kingdom       States
      high-income
      OECD
      nations

           2000

           2010 (projected)

Source: Economically Active Population 1950-2010, 4th Edition, Rev. 2, International Labour Organization, Geneva, 2002.




Page 11                                                                                    GAO-03-307 Older Workers
Figure 2: Labor Force Participation Rates for Persons Age 65+ in High-Income
Nations, 2000 and 2010


25 Percent




20




15




10




 5




 0
     Aggregate Canada             France       Germany           Italy        Japan         Sweden         United         United
     for all 23                                                                                            Kingdom        States
     high-income
     OECD
     nations

          2000

           2010 (projected)

Source: Economically Active Population 1950-2010, 4th Edition, Rev. 2, International Labour Organization, Geneva, 2002.



The relatively high rate of labor force participation by older U.S. workers
is being sustained by an increasing percentage of older women working. In
the United States, as in other high-income nations, labor force
participation among older men has declined since 1950 and, for the most
part, is projected to continue declining through 2010 (see fig. 3). During
that same period, however, labor force participation among older women
is projected generally to rise (see fig. 4). In the United States, labor force
participation among women age 50-64 will nearly double from 1950 to
2010, increasing from 31 percent to 58 percent.24




24
 Sweden has experienced the most dramatic rise in labor force participation among
women age 50-64, with rates tripling from 25 percent to 76 percent since 1950.




Page 12                                                                                    GAO-03-307 Older Workers
Figure 3: Labor Force Participation Rates for Men Age 50-64 in High-Income
Nations, 1950 to 2010


100 Percent



80



60



40



20



 0
     Aggregate Canada              France        Germany          Italy        Japan         Sweden       United          United
     for all 23                                                                                           Kingdom         States
     high-income
     OECD
     nations

           1950

           1970

           1990

           2000

           2010 (projected)

Source: Economically Active Population 1950-2010, 4th Edition, Rev. 2, International Labour Organization, Geneva, 2002.




Page 13                                                                                      GAO-03-307 Older Workers
                            Figure 4: Labor Force Participation Rates for Women Age 50 to 64 in High-Income
                            Nations, 1950 to 2010


                            100 Percent



                             80



                             60



                             40



                             20



                              0
                                  Aggregate Canada              France      Germany           Italy       Japan         Sweden       United           United
                                  for all 23                                                                                         Kingdom          States
                                  high-income
                                  OECD
                                  nations

                                       1950

                                       1970

                                       1990

                                       2000

                                       2010 (projected)

                            Source: Economically Active Population 1950-2010, 4th Edition, Rev. 2, International Labour Organization, Geneva, 2002.




Adverse Demographic         The size of the baby boom generation, rising life expectancy and declining
Trends Less Pronounced in   fertility are expected to contribute to a rising median age in high-income
the United States           nations. Because the baby boom generation is large in number, a growing
                            proportion of the populations in high-income nations will be over 60. In
Compared with Other         the United States, for example, this will be the case for about a quarter of
High-Income Nations         the population. Moreover, as this generation has grown older, life
                            expectancy has increased in all high-income nations. From 1955 to
                            2000, life expectancy in the United States increased from 70 to 77 years
                            and is projected to increase to 80 by 2040.

                            As a result of these trends, the median age of the U.S. population, like that
                            of other high-income nations, is projected to steadily increase in the
                            coming decades, but it will still be lower than that of most high-income


                            Page 14                                                                                     GAO-03-307 Older Workers
nations. Specifically, the median age of the U.S. population in 2030 is
expected to be comparable to the current median ages in some high-
income nations. For example, the median age of the U.S. population rose
from 30 to 36 years from 1980 to 2000 and is projected to increase to 40 in
2030 (see fig. 5). In contrast, the median age of the populations of high-
income countries was 38 years in 2000 and is projected to rise to 45 in
2030. Germany, Italy, Japan, and Sweden have the current and projected
oldest populations with median ages ranging from 40 to 41 years in
2000 and projected increases to 51 to 54 years in 2050.

Two factors will slow the trend toward an older population in the United
States compared with most other OECD nations: fertility and immigration
rates. Although fertility rates in high-income nations have declined overall
since 1980, during the same time they have increased from 1.8 to 2.0 in the
United States. The United States also has an immigration rate more than
four times as high as Sweden and Japan, almost three times as high as the
United Kingdom, and higher than that of most high-income nations.25




25
 The net immigration rate in the United States from 1995 to 2000 was 4.53 persons per
1,000 residents. Source: World Population Prospects: The 2000 Revision, United Nations
Population Division. Found in Nyce, Steven A. and Sylvester J. Schieber. 2001. “Our
Assumptions About Aging and What We Are Doing About It,” draft manuscript.




Page 15                                                      GAO-03-307 Older Workers
Figure 5: Median Age of the Population in High-Income Nations, 1980 to 2050
60 Years of age




40




20




 0
     Aggregate Canada             France        Germany          Italy         Japan         Sweden         United         United
     for all 23                                                                                             Kingdom        States
     high-income
     OECD
     nations

           1980

           2000

           2030 (projected)

           2050 (projected)

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population
Prospects: 2000 Revision and World Urbanization Prospects: 2001 Revision.



The consequences of these demographic trends are most evident in the
elderly dependency ratio. In most high-income nations, this ratio has been
rising throughout the last 50 years and is projected to grow at a faster rate
in the next half century (see fig. 6). The ratio in the United States is
relatively low compared with other high-income nations. For every
100 people of working age (15 to 59) in the United States, approximately
19 people were in or nearing retirement age (60 or above) in
2000 compared with a ratio of 22 for the aggregate of 23 nations the World
Bank has designated as high-income. This difference is projected to grow.
By 2050, this ratio for other high-income countries is projected to be 47 in
comparison with 35 for the United States. Even though the United States
ratio will be smaller than that of other high-income nations in 2050, it
represents an increase of over 75 percent from the 2000 ratio.




Page 16                                                                                     GAO-03-307 Older Workers
                         Figure 6: Elderly Dependency Ratio in High-Income Nations, 1950 to 2050




                         80 Percent




                         60




                         40




                         20




                          0
                              Aggregate Canada             France        Germany          Italy         Japan         Sweden        United         United
                              for all 23                                                                                            Kingdom        States
                              high-income
                              OECD
                              nations

                                    1950

                                    1980

                                    2000

                                    2030 (projected)

                                    2050 (projected)

                         Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population
                         Prospects: 2000 Revision and World Urbanization Prospects: 2001 Revision.




                         The recently enacted retirement policy reforms in Japan, Sweden, and the
Key Elements of          United Kingdom are expected to lead to higher labor force participation of
Reforms in Other         older workers. Reforms adjusting benefits in the national pension systems
                         of each of these nations provide incentives for older workers to extend
Nations Expected to      their working lives. National and employer-provided pension reforms that
Increase Labor Force     introduce defined contribution features that do not link benefits to a
                         specific age are also expected to encourage greater labor force
Participation of Older   participation of older workers. Other reforms that seek to limit the use of
Workers                  disability benefits as a route to early retirement will also influence the
                         older worker labor force participation. Acknowledging that improving the
                         employment opportunities of older workers is an important consideration,



                         Page 17                                                                                      GAO-03-307 Older Workers
                           each of these nations is studying or has enacted reforms that address the
                           issues of older worker’s employment more generally. Such reforms
                           include loosening or eliminating mandatory retirement age standards,
                           encouraging the elimination of age discrimination in employment,
                           improving older worker training, providing employment earnings
                           incentives, and exploring quality-of-work life issues such as the flexibility
                           of work arrangements.


Benefit Adjustments to     Reforms in the United Kingdom, Japan, and Sweden that increase the age
National Pension Systems   at which workers are eligible for benefits or allow flexibility in when and
May Increase Labor Force   how pension benefits can be taken are some of the policy changes that
                           may encourage older workers to stay in the workforce. The United
Participation of Older     Kingdom will phase in an increase in the age at which women become
Workers                    eligible for national pension benefits, so that, beginning in 2020, men and
                           women will no longer be able to draw benefits before age 65.26 Japan has
                           also enacted reforms that will gradually increase the full eligibility age for
                           its earnings-based national pension system. In Japan, by 2025 for men and
                           2030 for women, the earliest age when this pension can be claimed will
                           have risen from 60 to 65. Rather than increasing the age for benefit
                           eligibility, pension reforms in Sweden allow older workers to take a full or
                           partial national pension (i.e., one-fourth, one-half, or three-fourths of a full
                           pension) at age 61 or later with no upper age limit and continue working.27
                           This flexibility may make it easier to retire gradually with a mix of pension
                           benefits and earnings.

                           Additional pension reforms that change benefit calculations so they
                           reward continued work or discourage early retirement may also promote
                           continued labor force participation by older workers. Sweden changed its
                           benefit calculation to reward those who work longer. Under the new
                           pension system in Sweden,28 pensions are based on lifetime earnings,


                           26
                            Means-tested benefits are available from age 60. See appendix IV.
                           27
                            For example, if a worker “retires” from his/her full time job at age 61 and continues to
                           work part time while drawing 50 percent of his/her national pension, these earnings will
                           continue to add to the value of his or her pension account. When he or she retires
                           completely, the pension will be recalculated to take into account these additional earnings.
                           See appendix III.
                           28
                            Sweden switched from a traditional pay-as-you-go defined benefit plan to system that
                           combines a fully funded defined contribution plan and a pay-as-you-go “notional” defined
                           contribution plan with automatic adjustments to preserve financial stability. The notional
                           defined cotribution is the larger of the two plans, accounting for 86 percent of all national
                           pension contributions. See appendix III.



                           Page 18                                                           GAO-03-307 Older Workers
instead of the highest 15 out of 30 years of earnings as they were under the
old system. The United Kingdom adjusted its benefit calculation formula
to increase the reward for those who defer drawing benefits from the
national pension system. For example, by 2010, individuals who defer
drawing their pension benefits will receive benefits that are 10.4 percent,
rather than 7.5 percent, larger for each year deferred.29 In Japan, reforms
have changed how pensions are calculated, reducing the level of benefits
for future retirees through lower accrual rates. The expected effect of
these changes is a 20-percent reduction in lifetime benefits by
2020, thereby making early retirement less affordable.

Finally, reforms in Sweden and the United Kingdom, in changing how
pension benefits are indexed, may discourage early retirement. The new
pension system in Sweden indexes pension benefits to life expectancy.30
With increasing life expectancy, different generations of individuals with
similar work and earnings histories will have to work longer to maintain a
comparable standard of living in retirement. This benefit adjustment
provides incentives for increased labor force participation by requiring
individuals to bear the cost of increased life expectancy, either through
additional work or lower benefits. The United Kingdom also revised the
index it used to adjust benefits in the portion of its pension that provides
flat-rate benefits. Prior to the reform, the United Kingdom adjusted
benefits using either the higher of increases in average prices or average
wages as an index. Now the United Kingdom uses only average price




29
  Experts we spoke with disagreed about the effectiveness of this reform in increasing
older worker labor force participation. However, the government has considered changes
to this reform. For example, it is considering allowing people a choice between taking the
benefit increase as a lump-sum payment or as increases in each benefit payment. It is also
considering pushing up the implementation of the benefit increase so that it will take effect
in 2006 rather than 2010. This could increase the incentive for older worker labor force
participation.
30
  For example, a person’s pension in the notional defined contribution plan is calculated by
dividing their pension account (the value of their accumulated pension rights) by an
annuity factor. Estimated cohort life expectancy is the key element in the determination of
the annuity factor, which is also determined by the “norm” real rate of return (a 1.6-percent
increase in average real wages) and age at retirement. A higher average life expectancy for
a cohort will increase the size of the annuity factor for that cohort compared to preceding
cohorts. Consequently, individuals in later cohorts retiring at the same age and with the
same pension account as those in earlier cohorts will receive a lower pension. See
appendix III.




Page 19                                                         GAO-03-307 Older Workers
                          increases.31 Since prices tend to increase more slowly than wages, this
                          reform has effectively reduced benefits relative to earnings.32


To Increase Work          Each of the nations we studied implemented reforms that included defined
Incentives for Older      contribution features in their national and employer-provided pension
Workers, National and     systems, although this shift was more pronounced in Sweden and the
                          United Kingdom than in Japan. Defined contribution pensions are more
Employer-Provided         retirement age neutral than traditional defined benefit pension plans. As
Pension Reforms Moved     part of its recent national pension reform, Sweden instituted a pay-as-you-
Systems Towards Defined   go pension system with defined contribution features, including among
Contribution Features     other things a fixed contribution rate and notional individual accounts (the
While Other Reforms       “notional defined contribution pension”).33 The new Swedish pension
Addressed Disability      system also includes a smaller, funded defined contribution plan with an
                          account for each individual worker (the premium pension). Reforms
Insurance
                          introduced in the United Kingdom in 1988 and 2001 permitted individuals
                          to opt out of part of the national pension plan by participating either in
                          employer-sponsored defined contribution plans or defined contribution
                          individual pension plans called “personal pensions.”34 To participate in the
                          individual plans, workers obtain an account from a financial institution
                          and make contributions into their account or are provided access to a
                          pension by their employer.35 Japan implemented legislation permitting



                          31
                            The United Kingdom government announced in December 2002 that it will increase flat-
                          rate pension benefits in future years by at least 2.5% per year, even if this is larger than the
                          increase in average prices.
                          32
                           This change was introduced in 1980. Experts believe that the flat-rate basic portion of the
                          U.K.’s national pension, which currently amounts to about 15 percent of average male
                          earnings, will drop to 7 percent of average male earnings by 2050. However, means-tested
                          benefits indexed to earnings growth are available to low-income individuals from age 60.
                          See appendix IV.
                          33
                           This plan is called a notional defined contribution plan because pension rights (i.e., claims
                          on future pension income), not actual financial assets, are credited to the individual’s
                          notional accounts. In the U.S. context, this component of the Swedish national pension
                          could be considered analogous to “cash balance” plan, a type of defined benefit plan.
                          34
                           Prior to 1988, the United Kingdom’s national pension system had allowed individuals to
                          opt out of the earnings-related part of the national pension system for employer-provided
                          defined benefit plans only. See appendix IV.
                          35
                           Workers continue to pay contributions to the national pension system, but the
                          government transfers a portion of contributions to individuals’ personal or stakeholder
                          pension account to compensate them for foregoing earnings-related national pension
                          benefits. See appendix IV.




                          Page 20                                                            GAO-03-307 Older Workers
employer-provided and personal defined contribution pension plans in
2002.36

In Sweden and the United Kingdom, the inclusion of defined contribution
features in the national pension system has prompted complementary
changes among the employer-provided pensions. In Sweden, three of the
four major employer-provided pension plans converted from defined
benefit plans to pure defined contribution plans or plans with a mix of
both features following the national pension reform.37 In the United
Kingdom, many employers have closed their defined benefit plans to new
workers and replaced them with defined contribution plans. For Japan,
where defined contribution pensions were only recently introduced, there
is currently little data on the number of individual or employer-provided
plans being formed or on the degree to which employers are substituting
defined contribution plans for existing defined benefit plans.

The inclusion of defined contribution features in national and employer-
provided pension systems is expected to encourage greater labor force
participation of older workers. Because workers will have a greater
responsibility for ensuring retirement through contributions and the
returns they can earn on them, it will be in their best interest to make
contributions for as long as they can. In addition, because defined
contribution plans often have greater portability than defined benefit
plans, older workers may have greater ability to shift to jobs that suit their
leisure and health needs rather than retiring.38




36
 The law specifies the earliest age of withdrawal of pension funds from these defined
contribution plans as 60 if enrolled for 10 or more years, or 65 if enrolled for less than 10
years. For a summary of Japan’s national and employer-provided pension system, see
appendix II.
37
  Employer-provided pensions, which are negotiated through collective bargaining, cover
close to 90 percent of Swedish workers. See appendix III.
38
 Defined contribution plans likely increased the portability of benefits for many United
Kingdom workers previously covered by defined benefit plans. In Sweden, workers’
pension benefits were more portable under the old employer-provided pension plans than
under the defined benefit plans in many other nations. However, some Swedish pension
experts noted that because pension premiums are generally higher for older workers, and a
workers’ final employer has typically been responsible for paying their pension benefits, it
has been difficult for older workers to change jobs later in their careers. These experts
argued that with the recent negotiated pension plan changes the cost burden on the final
employer is reduced.




Page 21                                                           GAO-03-307 Older Workers
                             Both Sweden and the United Kingdom, where disability insurance has
                             traditionally been an avenue to early withdrawal from the labor force,
                             have introduced reforms in recent years that will tighten eligibility of
                             disability benefits.39 In efforts to reduce the amount of early retirement
                             financed through disability pensions, throughout the last decade Sweden
                             has implemented successive reforms to tighten the eligibility requirements
                             for disability insurance. This has included eliminating the ability of older
                             workers to take a disability pension solely on the basis of long-term
                             unemployment or a combination of unemployment and medical reasons.
                             Medical reasons now provide the only valid criteria for granting a
                             disability pension in Sweden. As part of its efforts, the United Kingdom,
                             since the mid-1990s has tightened eligibility requirements, reduced paid
                             benefits, and provided more support for returning to the workforce after
                             an absence. For example, the government now reviews claims of
                             incapacity to work every 3 years compared to the previous policy of not
                             reviewing claims after the initial application, reduces or offsets disability
                             benefits if the recipient also receives an employer-provided pension over a
                             certain minimum level, provides services such as job search assistance to
                             the disabled as a way to enable their return to work, and will test a policy
                             allowing recipients to keep a portion of their wages if they return to
                             work.40


Labor Market Policies May    Each nation we studied has enacted, or is considering, policies that
Reduce Barriers to Work at   address barriers to older workers’ continued employment such as
Older Ages                   mandatory retirement and age discrimination. In conjunction with its
                             national pension reform, Sweden has already passed legislation giving
                             employees the right to remain in employment until the age of
                             67, prohibiting the widespread practice of collective bargaining
                             agreements prescribing mandatory retirement at age 65.41 As members of
                             the European Union, both Sweden and the United Kingdom must
                             legislatively prohibit employment discrimination based on age by 2006. It
                             is unknown how the European Union requirement will affect mandatory



                             39
                              In contrast, statistics provided by a Japanese official indicate that workers have not used
                             disability insurance as a major means of withdrawing early from the labor force.
                             40
                              The policy that will allow disability recipients to keep a portion of their wages if they
                             return to work is subject to means testing and a 1-year time limit.
                             41
                               It should be noted that reaching an agreement on changing the mandatory retirement age
                             in Sweden was difficult, and the legislation that implemented this change has been
                             controversial.




                             Page 22                                                           GAO-03-307 Older Workers
retirement ages in specific industries or occupations in the United
Kingdom.

In the absence of legislation, both the United Kingdom and Japan have
encouraged employers to voluntarily end age discrimination. The United
Kingdom, for example, has publicized the benefits of an age-diverse
workforce, and issued best practices for eliminating age discrimination.
Like the United Kingdom, Japan has also encouraged firms to voluntarily
modify employment practices and retirement policies. The government
has programs that subsidize the wages of workers who take jobs at
reduced pay after mandatory retirement and subsidizes companies that
modify their employment practices to accommodate older workers.

Each of the nations we studied has also made some efforts to provide
older workers with access to training, job search assistance, and
workplace flexibility. In the United Kingdom, for example, one
government program provides job search assistance for people age 50 and
older when they have been out of work 6 months or longer and also offers
training opportunities and a wage enhancement.42 As part of its efforts,
Japan has employment job assistance centers (called “Silver Human
Resource Centers”) that provide older workers temporary jobs or
volunteer opportunities.43 The Japanese government has also promoted a
program to match older workers with suitable employers. In Sweden,
efforts include the creation of a commission to explore policies to
promote increased flexibility in working arrangements, such as granting
older people a legal right to work part-time, and adjusting the public
financing of education to promote skill development among older
workers.




42
 All clients are eligible to receive services to help them find employment; clients are also
eligible for up to £60 per week wage enhancement if they meet certain criteria. See
appendix IV.
43
 See appendix II.




Page 23                                                          GAO-03-307 Older Workers
                         The experiences of other nations suggest that the scope and
Experiences of Other     comprehensiveness of reforms, the transparency and availability of
Nations Suggest That     information, and the strength of the economy play important roles in
                         encouraging labor force participation by older workers. According to
the Nature of Reforms    government officials in Japan, Sweden, and the United Kingdom, reforms
Plays a Key Role in      have a better chance of succeeding if they are comprehensive and
                         complementary. In addition, they said that education and transparent
Increasing Labor         information is important for helping workers understand what the reforms
Force Participation of   will mean for their retirement income. Officials also agreed that a strong
Older Workers            economy was important for success.

                         Officials from each of the nations we studied said that the success of
                         national pension reform, including those elements that influence older
                         workers’ labor force participation, depends, in part, on the scope and
                         purpose of the reforms. Officials from all three nations noted that reforms
                         are most successful when they are comprehensive in scope. Both Sweden
                         and the United Kingdom, for example, in reforming their pension systems
                         also made changes to both their disability insurance programs and labor
                         market policies. Some officials also stressed that reforms should be
                         designed so that the intent of a particular reform is not thwarted by
                         countervailing policies in other areas. For example, Swedish pension
                         experts and other officials have acknowledged that the continued
                         presence of mandatory retirement ages in collective bargaining
                         agreements and labor regulations can work at cross-purposes with
                         features in the new national pension system that now relate benefit levels
                         to retiree life expectancy and that essentially have no upper retirement
                         age. They noted that to increase the effectiveness of the work incentives in
                         their national pension reforms, these impediments will have to be
                         resolved, as well as the need to establish complementary reform policies
                         that foster alternative work arrangements and quality of work-life issues
                         generally. Other nations also acknowledged the importance of
                         complementary reforms. Japan has supplemented its national pension
                         reforms with wage subsidies to encourage older employees to continue to
                         work. Japan and the U.K. also support their national pension reforms by
                         committing additional resources to organizations and services that provide
                         job search assistance to older workers.

                         Officials in each nation that we studied emphasized that access to
                         information and public education about how the reforms will affect
                         retirement income would also be needed if the reforms were to have their
                         intended effect. There is concern in these nations that many workers are
                         currently unaware of the implications of the reforms. For example,
                         surveys conducted by the Swedish government and advocates for senior


                         Page 24                                             GAO-03-307 Older Workers
               citizens indicate that many individuals do not yet have a detailed
               understanding of the new pension system. U.K. government officials
               expressed concern that their citizens could have similar difficulties
               understanding the implemented reforms. To help their citizens understand
               that they may need to work longer or save more in order to ensure an
               adequate retirement income, each of the nations we studied has taken
               steps to educate workers. In Sweden, the government has launched
               several large information campaigns since the new pension system’s
               implementation. In addition, participants receive annual statements of
               their account balances in both the notional defined contribution (NDC)
               and premium pensions. To help educate its workers, the U.K. government
               has created a pension forecast tool that will present workers with
               estimates of pension income from both government and nongovernment
               sources. In Japan, because defined contribution pensions are very new
               and offer both advantages and disadvantages to participants, employers
               are required to provide information to employees about defined
               contribution plan features and management.

               In addition to the importance of information and education, government
               officials and pension experts agreed that a strong national economy is
               necessary for the success of pension and labor market reforms that may
               contribute to higher labor force participation by older workers. A strong
               economy eases the implementation of pension reform by offering
               increased employment opportunities for older workers. High
               unemployment and low economic growth will limit older workers’ ability
               to remain employed, forcing them into complete retirement. Experts we
               spoke with believe that the low growth of the Japanese economy during
               the last decade has been a factor limiting the scope of pension and labor
               market reform, for example, in the area of mandatory retirement ages.
               Fiscal constraints also preclude more fundamental pension reform of
               system financing and structure. In contrast, the currently strong U.K.
               economy acts as an incentive for employers to retain their older workers
               and there will likely be an increased need for older workers in the long
               term, particularly as the workforce ages between now and 2020. The
               current tight labor market also makes it easier for job search assistance
               programs to find jobs for clients.

               In many nations, despite their numerous differences, increasing the labor
Concluding     force participation of older workers is an element of the policies chosen to
Observations   reform national pension systems. Officials from each of the three nations
               we studied emphasized this issue should be considered in their own
               nation’s reform efforts. Encouraging workers to stay in the labor force
               longer can help alleviate the fiscal and budgetary stress induced by rising


               Page 25                                             GAO-03-307 Older Workers
national pension expenditures and can potentially enhance economic
growth. In those nations where national pension reform has included
benefit reductions, working longer can also enable older persons to avoid
serious reductions in their standard of living in retirement.

An important result from the experience of other nations is that to
effectively foster greater labor force participation among older workers,
individual reform components should be comprehensive in design so that
employment incentives operate in a mutually reinforcing manner. Thus, in
the nations we studied, changes in the national pension system were often
matched by corresponding complementary initiatives affecting employer-
provided pensions and the operation of the national labor market. Officials
from each of the three nations we studied also identified other critical
labor market policies that needed to be harmonized with these changes,
particularly in the area of employment age discrimination and regarding
mandatory retirement ages. Such comprehensive reforms can face
formidable challenges to their design and implementation. In Sweden, for
example, where prospects may be more favorable because the national
pension system accounts for a large proportion of retirement income,
comprehensive reform remains a work in progress with continuing
discussion and debate. Nevertheless, the returns from a comprehensive
approach could far outweigh the risks of failure.

The reform policies chosen by other nations should be evaluated within
the context of their societies and institutions, however. For example,
benefit payments from the national pension system in Sweden currently
replaces a much larger percentage of pre-retirement income than in the
United States. Therefore, benefit reductions in these nations will have
significantly different effects on retirement income than similar actions
taken in the United States. In addition, reforms that more closely link
benefits to life expectancy, such as those implemented in Sweden could
have significantly different distributional effects in the United States. For
example, American subpopulations with lower average life expectancies,
such as African Americans, would be more adversely affected by this
policy change since they would collect benefits for shorter time periods
relative to other racial groups. African American men have shorter life
expectancies at birth and at age 65 compared to males of other ethnicities.

Finally, the focus on extending the labor force participation of older
workers has also led to a reconsideration of the traditional definition of
retirement where a person is either considered working or retired, to one
that is more flexible or continuous in nature. The long-term trend of
improved health and age longevity of older persons throughout the high-


Page 26                                              GAO-03-307 Older Workers
                     income nations now permits a range of options beyond the traditional
                     career employment/out-of-the-workforce retirement tradeoff.
                     Acknowledging this development, experts and officials from the nations
                     we studied noted the importance of quality of work-life issues, including
                     the wider use and availability of part- time employment and other
                     alternative employment arrangements, and fostering “lifelong learning,” as
                     other key components in a long-term strategy to extend the labor force
                     participation of older workers. In some ways, the United States has
                     already forged ahead in this area, through its prohibition of age
                     employment discrimination, broad elimination of mandatory retirement
                     ages, and through its public discussion of bridge employment, phased
                     retirement, and other alternative employment arrangements. However,
                     opportunities exist to do more. In recent work, we found that few U.S.
                     employers have focused on making such options available to their older
                     employees on any widespread basis, and numerous economic and
                     regulatory obstacles remain that can discourage the employment of older
                     workers.44 This led us to recommend to the Secretary of Labor that an
                     interagency task force be established to develop legislative and regulatory
                     proposals addressing the issues raised by the aging of the labor force. The
                     challenge of how to extend the work-lives of older employees, given the
                     new demographic realities of the 21st century, presents real opportunities,
                     not only to bolster economic growth but to help secure retirement income
                     adequacy for millions of working Americans and their families.


                     We provided copies of this report to the Secretary of Labor and
Agency Comments      Commissioner of Social Security. They provided technical comments
and Our Evaluation   which have been incorporated where appropriate.

                     As arranged with your office, unless you publicly announce its contents
                     earlier, we plan no further distribution of this report until 30 days from its
                     issue date. At that time, we will send copies of this report to appropriate
                     congressional committees and other interested parties. Copies will also be
                     made available to others upon request. In addition, the report will be
                     available at no charge on GAO’s Web site at http://www.gao.gov. Please




                     44
                      For a discussion of these and related issues, see U.S. General Accounting Office, Older
                     Workers: Demographic Trends Pose Challenges for Employers and Workers, GAO-02-85
                     (Washington, D.C.: Nov. 16, 2001).




                     Page 27                                                        GAO-03-307 Older Workers
contact me at (202) 512-7215, Charles Jeszeck at (202) 512-7036, or Jeff
Petersen at (415) 904-2175, if you have any questions about this report.
Other major contributors to this report are listed in appendix V.

Sincerely yours,




Barbara D. Bovbjerg
Director, Education, Workforce
 and Income Security Issues




Page 28                                             GAO-03-307 Older Workers
                       Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


                       To determine how the United States fares internationally regarding current
Analyzed Statistical   and projected trends in key demographic and labor force characteristics,
Data                   we compiled and analyzed data1 from the United States and seven other
                       high-income Organisation for Economic Cooperation and Development
                       (OECD) nations.2 In conducting this comparison, we examined the fertility
                       rate, median age of the population, life expectancy at birth, old-age
                       dependency ratio, population by sex and age group, labor force
                       participation rate by sex and age group, and the unemployment rate by sex
                       and age group for each of the eight nations. We also compared the United
                       States to an aggregate for these characteristics that we constructed for a
                       broader group of 23 OECD nations.3


                       In order to identify the dynamics of labor force participation rates of older
Reviewed Literature    workers, particularly with regard to the key incentives that influence
and Conducted          work/retirement decisions, and to identify those nations that might be
                       most appropriate to illustrate the role of extending the labor force
Interviews with        participation in national pension system reform, we reviewed literature
Experts                and interviewed experts. We conducted an extensive review of the
                       international retirement literature, literature on the impact of aging
                       societies, and previous analyses of conditions in other countries. Our
                       review included research from organizations such as the OECD,
                       International Labour Organization (ILO), the Center for Strategic and
                       International Studies (CSIS), and the World Bank, as well as government
                       agencies such as Japan’s Ministry of Health, Labor, and Welfare; Sweden’s
                       Ministry of Industry, Employment and Communications; and the United
                       Kingdom’s Department for Work and Pensions. We also consulted with
                       experts from many of these organizations, including the CSIS, the OECD,
                       the World Bank, as well as the U.S. Departments of Labor and the
                       Treasury, and the U.S. Social Security Administration. In addition, we


                       1
                        These data include OECD summary statistics regarding labor force participation among
                       older workers, United Nations Population Division data on demographics, and ILO data on
                       actual and projected labor force participation based on population estimates from the
                       United Nations Population Division.
                       2
                        The group of high-income nations we analyzed are Canada, France, Germany, Italy, Japan,
                       Sweden, and the United Kingdom.
                       3
                        These nations are Australia, Austria, Belgium, Canada, Denmark, Finland, France,
                       Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, The Netherlands, New
                       Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the
                       United States. We obtained demographic data on these nations from the United Nations
                       Population Division and labor force statistics from the ILO.




                       Page 29                                                      GAO-03-307 Older Workers
                        Appendix I: Scope and Methodology




                        conferred with individual experts affiliated with major retirement research
                        institutes at universities or other research institutes such as the National
                        Bureau of Economic Research, the Urban Institute, and the Brookings
                        Institute both for background information on national pension policy as
                        well as their recommendations on which countries to use as case studies.

                        On the basis of these interviews and our research review, we selected
                        three nations for intensive study that had high rates of labor force
                        participation for older workers and had enacted pension reforms within
                        the last decade: Japan, Sweden, and the United Kingdom. We chose Japan
                        for in-depth study for its extremely high labor force participation rates of
                        older workers, because it already has a large aged population that will
                        continue to grow significantly in the near future, and because it has taken
                        steps over the last decade to address the consequences of an aged society
                        through the reform of its pension system and labor market policies. We
                        selected Sweden for its high rates of labor force participation of older
                        workers, substantive reform to the national pension system, as well as its
                        tradition of extensive labor market and social welfare policies. We
                        selected the United Kingdom for its national and employer-provided
                        pension reforms that reversed a previous trend of rising national pension
                        expenditures (as a percent of gross domestic product) and for its active
                        labor market policies regarding older workers.4


                        We performed a focused examination of these three nations’ pension
Conducted Site Visits   systems and labor market policies through site visits to each country.
in Three Foreign        During our on-site study of each nation, we met with key government
                        officials concerning pension and labor market policy, representatives from
Countries               employer organizations and labor unions, advocacy groups, and well-
                        known scholars whose research has direct relevance to understanding
                        pension systems and older worker behaviors. In addition to speaking with
                        us, many interviewees provided relevant written materials and statistics
                        for our use.



                        4
                         For additional details on key elements of each country’s pension system, please see
                        appendixes II to IV.




                        Page 30                                                        GAO-03-307 Older Workers
                            Appendix II: Japan
Appendix II: Japan



Japanese Pensions
and Labor Market
Policies

                            Retirement income for the majority of Japanese is mainly derived from the
Old-Age and Disability      national pension system. Income from work constitutes the next largest
Pensions                    share of retiree’s income. Employer-provided pensions, or the earnings
                            derived from lump-sum retirement benefits, are a small portion of this
                            income. Disability pensions are used by a very small percentage of the
                            working age population.


National Old-Age Pension    The Japanese national old-age pension system consists of two tiers, both
System                      of which are financed on a pay-as-you-go basis. The first is the Old-Age
                            Basic Pension, which covers all workers and their dependents. The
                            premium for the basic pension is paid by the self-employed directly and by
                            employees through their employers. The second tier is the Old-Age
                            Employees Pension that covers salaried workers and their dependents,
                            about 70 percent of the workforce. The premium for the employee’s
                            pension is paid equally by the employee and employer.

Old-Age Basic Pension       This is a relatively small pension financed primarily by a fixed premium
                            paid either directly if self-employed or through one’s employer. One-third
                            of the financing comes from general revenues. Current premiums are
                            about $111 per month.1 Premiums are projected to almost double by 2020.
                            Benefit amounts are determined based on the number of months of
                            contributions, with 25 years of contributions required for full eligibility.
                            The average monthly benefit in 2001 was about $417. Full pensions begin
                            at age 65 and are not offset by other income. Pensions may be received as
                            early as age 60 at a reduced rate.

Old-Age Employees Pension   This is an earnings-based pension financed by premiums paid equally by
                            the employer and employee. The total premium rate is currently 17.35
                            percent of payroll and is projected to rise to 27.35 percent by 2020.
                            Benefits are calculated based on the year of birth, the number of months
                            in the system and average monthly earnings. There are two major


                            1
                            All dollar figures are calculated using an exchange rate of 120 yen per dollar.




                            Page 31                                                         GAO-03-307 Older Workers
                    Appendix II: Japan




                    components of the employees pension. The first is the flat rate portion,
                    which is based on the year of birth multiplied by the number of months of
                    contributions. The second component is calculated using earnings and
                    months of contributions. The growth rate of benefits for each additional
                    year of work for this portion is determined by year of birth. The average
                    monthly employees pension was about $1,467 in 2001. Full pensions can
                    currently be received from age 61; eligibility ages are scheduled to
                    gradually rise to age 65 by 2030. Benefits are reduced until age 70 if
                    earnings while receiving this pension exceed a certain level.


Employer-Provided   Employer-provided pensions are primarily defined benefit in nature and
Pensions            may be received as (a) lump sums, (b) annuities, or (c) a combination of
                    the two. The smaller the company, the more likely it is to use the lump-
                    sum option. Benefits are available at mandatory retirement, usually age
                    60. About 90 percent of companies offer some type of retirement benefit,
                    with about one-third of full-time employees receiving benefits through
                    employee pension funds (EPF) and nearly the same level through what are
                    known as tax-qualified pension plans (TQPP).2 In 2001, two laws were
                    enacted that affect employer-provided pensions. The first, the Defined
                    Benefits Pension Law will impact EPF and TQPP. The second, the Defined
                    Contribution Pension Plan Law will allow the creation of new pension
                    plans for employees and individuals.

                    EPF are responsible not only for the occupational pension, but also a
                    carve-out or “substitution” portion of the national old-age employees
                    pension. EPF offer the remuneration portion of the old age employees’
                    pension and provide added benefits. According to the Pension Fund
                    Association these benefits should be 30 percent or more of the
                    substitution portion of the employees’ pension. About 43 percent of
                    employees in EPF take their benefits in the form of a lump-sum payment.

                    TQPP participants receive pension benefits that are contracted between
                    companies and financial institutions like banks or life insurance
                    companies. This arrangement is more likely to be used by smaller



                    2
                     The Employees’ Pension Fund is a public corporation made up of businesses and insured
                    individuals. Management duties are performed by trust banks, insurance companies, and
                    investment advisory companies and there must be an option to receive benefits as a
                    lifetime annuity for those with over 20 years of service. TQPPs, while also managed by
                    financial institutions, do not have a carve-out of national employees benefits and are not
                    required to offer lifetime annuities.




                    Page 32                                                        GAO-03-307 Older Workers
                        Appendix II: Japan




                        companies, and benefits are likely to take the form of lump-sum payments
                        or fixed term annuities. The Defined Benefits Pension Law requires that no
                        new TQPP be created and all existing TQPP be transferred into new
                        contract- or fund-type pension arrangements.

                        New defined contribution pensions were recently introduced in Japan for
                        corporations and individuals. Contributions are managed by the
                        beneficiaries themselves, and pension benefits are paid as old-age benefits,
                        disability benefits, or lump-sum death benefits.


Disability Insurance    Disability insurance pensions are relatively rare in Japan. Like the two-tier
Pensions                Old-Age Pension System, there are two tiers of disability pension. Slightly
                        more than 1 percent of the Japanese population receives one of these
                        pensions. The Disability Basic Pension has benefits similar to that of the
                        Old-Age Basic Pension with additional benefits for those with dependent
                        children. Approximately one million disabled individuals aged
                        20-64 receive this pension. The Disability Employees Pension benefits, like
                        the Old-Age Employees’ Pension benefits, are based on earnings and
                        months of contributions with additional benefits when a spouse is present.
                        Less than 200,000 disabled employees aged 20-64 received this pension in
                        2001.


Reforms over the Past   Concern about the balance between benefits, retirement ages, and
Decade                  contribution levels in the old-age pension system have been growing over
                        the last two decades. Proposals to raise the normal retirement age first
                        surfaced in 1980 and were finally agreed to for the flat-rate portion of the
                        employees' old age pension in 1994 and the earnings-based portion in 1999.
                        These eligibility age increases will be phased in over several decades. The
                        pension system undergoes actuarial reevaluation at least every 5 years to
                        balance premiums and benefits with existing socioeconomic conditions.

The Reform Process      The Japanese have used Pension Councils coordinated by the Ministry of
                        Health and Welfare3 to facilitate pension reforms. Pension Councils are
                        composed of representatives of employers’ groups and labor unions, as
                        well as academic researchers and government officials. While the Ministry
                        of Health and Welfare undertook the role of gathering and supplying
                        information, employer organizations and labor unions were able to


                        3
                        The Ministry of Health and Welfare is now the Ministry of Health, Labor and Welfare.




                        Page 33                                                       GAO-03-307 Older Workers
                            Appendix II: Japan




                            participate in the debate by means of participation in the Pension Council
                            as official members and by publicizing their views concerning pension
                            reform through editorials.

                            The changes that grew out of the Pension Councils can be summarized as
                            follows:

Eligibility Ages            The normal retirement age for the flat-rate portion of employee pension
                            will rise to 65 for men in 2013 and 2018 for women. Eligibility ages for the
                            earnings-based portion of the employee pension will rise to 65 in 2025 for
                            men and 2030 for women.

Contributions               The premiums for the basic (fixed) and employees’ (earnings-based)
                            systems are revised at least every 5 years based on the projected health of
                            the systems. Current premiums on the earnings-related pension total
                            17.35 percent of payroll. Both premium rates are expected to grow in the
                            future. The base of earnings covered by premiums to the employee
                            pension was expanded to include income from bonuses, but the total
                            percentage of earnings that will be needed to support the system has been
                            reduced.

Calculated Benefits         Employee pension benefit levels for those born prior to April 1, 1941, are
                            higher than for those born after that date. This is true for both the flat-rate
                            and the earnings-related portions of the pension. Pension benefit levels
                            were reduced by about 5 percent in 2000. It has been estimated that
                            lifetime employee pension benefits will be reduced by about 20 percent by
                            2020.

Employer-Provided Pension   Outside of the Pension Council process, changes were made to employer-
Reforms                     provided pensions through the passage of the Defined Benefits Pension
                            Law and the Defined Contribution Pension Plan Law.

                            Enactment of the new Defined Benefits Corporate Pension Law requires
                            that existing TQPP be abolished by 2012 and their funds must transfer
                            either to the EPF or to new contract or fund-type corporate pensions. The
                            primary purpose is to improve protection of beneficiaries’ pensions.

                            The new Defined Contribution Pension Plan Law was designed to help
                            those unable to participate in a defined benefit pension system through the
                            creation of corporate and private defined contribution pensions. The
                            target group for this pension is the self-employed and employees of small
                            companies. Portability of pension benefits was also a factor in the creation
                            of the Defined contribution Pension Plan Law.


                            Page 34                                                GAO-03-307 Older Workers
                              Appendix II: Japan




                              The Japanese labor market has a number of features and practices that
Labor Market Policies         affect the labor force participation of older workers. These practices may
                              enhance labor force participation up to a certain age but decrease it after
                              that point.


Lifetime Employment           During the period of high economic growth in the 1960s, companies
                              instituted long-term or lifetime employment policies that effectively
                              guaranteed employment until a worker reached mandatory retirement age.
                              These policies offered companies a way to ensure that their investment in
                              training achieved a positive return and provided workers job security. This
                              policy is limited in that it applies only to full-time workers who are
                              predominantly men.


The Seniority System          Promotions and wages are highly related to seniority in Japanese
                              companies. Under such a system, wages rise as longevity with a firm
                              increases. This is in part to reflect the greater knowledge and experience
                              gained with greater tenure, but also to reflect the rise in cost of living as
                              employees aged. Typically, the wage of a male employee rises until about
                              age 50-55, after which it falls sharply. For many workers at large
                              companies wages are 30-50 percent lower at age 65 than at age 55. This
                              reduction makes older workers more attractive to employers by making
                              them cost competitive with younger workers.


Employee Training             Training in Japanese companies usually takes the form of on-the-job
                              training. The training is usually highly company-specific and is closely
                              related to the seniority system. Training opportunities decrease once an
                              employee reaches a high level of seniority.


Age Discrimination and        There is no law in Japan that prohibits discrimination on the basis of age.
Mandatory Retirement          However, recent legislation encourages employers to voluntarily not
                              discriminate against older workers in the hiring process. Japanese law
                              permits mandatory retirement, but the mandatory retirement age can be
                              set no lower than age 60.

Recent Initiatives Directed   The Japanese government has enacted some initiatives to encourage the
at Older Workers              employment of older workers. Rather than legislate an increase in the
                              mandatory retirement age in the current weak economy, the government
                              has urged companies to extend the employment of older workers



                              Page 35                                               GAO-03-307 Older Workers
Appendix II: Japan




voluntarily and to offer some employment services and grants that are
expressly targeted toward older workers.

The policies for accomplishing this are either employment extension
programs whereby workers who have retired are rehired or the company
may increase its mandatory retirement age. To date, the preferred course
of employers has been to offer reemployment or extended employment
where such action is beneficial to the company. Companies are provided
subsidies—called Promotion Grants to Secure Continued Employment—
for this purpose.

Japanese officials advised us that there are no job training programs
geared specifically toward older workers. However, the Silver Human
Resource Centers4 offer skills training and job-matching services are
offered. These centers also provide seniors with temporary or short-term
community-related jobs. Other programs provide grants to employers to
develop the skills of the middle-aged and older workers to improve their
employability. There are also employment programs that focus on
providing information to employers on the benefits older workers offer
and how they can be accommodated.

Through the unemployment insurance system, subsidies are available
directly to employees 60 to 64 years old who are working full-time and
earning less than 85 percent of their former wage. This subsidy pays up to
25 percent of the employees’ wage after age 60 until age 65. Utilization of
this subsidy is low, however, due to the requirements placed on
participation. For example, recipients must be working full-time and must
be nominated by their employer. In addition, beneficiaries must have been
paying into the unemployment insurance system for at least 5 years and
the benefit period is reduced if they received unemployment payments
following mandatory retirement. This program will become less generous
and participation requirements will become more stringent in the future.




4
 Silver Human Resource Centers are community-based organizations designed to facilitate
the continued involvement of people over age 60 in community life.




Page 36                                                      GAO-03-307 Older Workers
Appendix II: Japan




We were advised that participation in these programs, while small, is
expected to grow as the retirement eligibility ages of the national pension
system increases.




Page 37                                              GAO-03-307 Older Workers
                           Appendix III: Sweden
Appendix III: Sweden



Swedish Pensions and
Labor Market Policies

                           Retirement income for the majority of Swedes is mainly derived from the
Old-Age and Disability     public national pension system. Employer-provided pensions, on average,
Pensions                   account for roughly 20 percent of total pension entitlements. These
                           pensions, however, are relatively more important to higher income
                           individuals (with incomes above the ceiling in the national old age
                           pension).1 Private (individual) pensions account for an even smaller
                           amount, but have increased in importance over the last decade. Disability
                           pensions have also been an important source of income for many who
                           leave the labor force prior to becoming eligible for an old-age pension.

                           The major components of the Swedish old age and disability pension
                           systems are undergoing important structural changes. With legislation
                           passed in 1998, Sweden began implementing a fundamental reform of its
                           national old-age pension system.2 In addition, there have been changes to
                           the structure of employer-provided pensions complementing the national
                           pension reform. Changes in the eligibility criteria and administrative
                           structure of disability pensions have also accompanied old-age pension
                           reform.


National Old-Age Pension   The old national pension system was a pay-as-you-go defined benefit plan,
System—Old System          combining a flat rate universal benefit (the “basic pension”) with an
                           earnings-related supplement (the “ATP”). The basic pension, introduced in



                           1
                            Most benefits within the Swedish social security system are linked to the “base amount,”
                           an amount of Swedish Krona (SEK) that is set each year by the government and
                           appreciated by the Consumer Price Index. For 2002, the base amount was SEK 37,900
                           (roughly $4,341 at $1 = SEK 8.73). The ceiling for all social security transfers is 7.5 base
                           amounts. Beginning in 2001, the ceiling for the national pension system has been indexed
                           to the growth in average wages and not the price index, and the base amount for this
                           system is somewhat higher (SEK 38 800, roughly $4,444).
                           2
                            There will be a gradual transition from the “old” to “new” national pension systems for
                           persons born between 1938 and 1953. Persons born in 1938, for example, will receive 20
                           percent of their retirement benefit from the new system and 80 percent from the old
                           system. The share of benefits from the new system increases for each following birth year
                           until persons born in1954 receive their entire benefit from the new system. Consequently,
                           the structure of the old pension system will continue to influence old-age pensions for
                           some time.




                           Page 38                                                          GAO-03-307 Older Workers
                           Appendix III: Sweden




                           1913, was the first compulsory old age pension in the world to cover all
                           citizens regardless of occupation. This flat rate pension was paid in full to
                           everyone with at least 40 years of residence in Sweden between the ages
                           16 and 65, or with 30 years of work. ATP was introduced in 1960. Under
                           ATP, a full earnings-related benefit could be obtained with 30 years of
                           covered earnings at age 65, based on the average of the best 15 years. The
                           normal (or statutory) eligibility age was 65 years for both the basic
                           pension and the ATP, but both pensions could be drawn from the age of
                           61 (60 prior to 1998) with a life-long reduction or postponed to the age of
                           70 with a life-long increase.

                           The national pension reform was the result of discussions that began in
                           the 1980s in response to concerns about demographic trends and
                           accelerated in the early 1990s in response to a serious economic crisis and
                           a change in the government.3 The old national pension system was seen to
                           be unfair in that it favored those who had short working careers or
                           variable earnings. In addition, the old system faced severe problems with
                           financial sustainability and was expected to require large increases in
                           contribution rates in the future.


National Old-Age Pension   The new national old-age pension system consists of an earnings-related
System–New System          pension and a minimum guaranteed pension.

Earnings-Related Pension   The new earnings-related pension is a defined contribution scheme with
                           two components: a pay-as-you-go “notional defined contribution” plan and
                           a fully funded financial defined contribution plan (the “premium
                           pension”). The total contribution rate for both plans is 18.5 percent of
                           earnings, paid by both employers and employees.4 Unlike the old system,
                           the final pension in both plans is based on lifetime earnings. In addition,
                           there is no normal eligibility age in either plan. Benefits may be drawn, in
                           full or in part (i.e., one-fourth, one-half, or three-fourths of a full pension)
                           at age 61 or later with no upper age limit. Earnings may be combined with
                           a full or partial pension and will continue to generate pension



                           3
                            In the early 1990s, unemployment reached historically high levels in Sweden, seriously
                           eroding the contribution base for the national pension system. In addition, in the fall of
                           1991, the Social-Democratic government was replaced by a four-party, nonsocialist
                           government.
                           4
                            Employees only pay on earnings up to the pension ceiling, while employers pay on all
                           earnings.




                           Page 39                                                          GAO-03-307 Older Workers
                                Appendix III: Sweden




                                contributions. In both plans, individuals receive pension rights from
                                earnings as well as income replacement transfers (i.e., disability and
                                sickness benefits) and special credits (i.e., for time spent in child rearing,
                                university studies, or compulsory military service). Pension credits from
                                income replacement transfers and special credits are funded by general
                                revenues.

Notional Defined Contribution   The notional defined contribution (NDC) plan is the larger of the two
Pension                         earnings-related pensions, accounting for 86 percent of total contributions.
                                The NDC plan is financed according to pay-as-you-go principles, but the
                                system also includes pension reserve or “buffer” funds. The contribution
                                rate for the NDC plan is 16 percent, with contributions credited to
                                individual “notional” accounts.5 These accounts are notional in that
                                pension rights (i.e., claims to future pension income) and not financial
                                assets, are credited to them.6 During the accumulation period, the pension
                                rights credited to the notional individual accounts are indexed by average
                                wage growth. At retirement, the accumulated “notional capital” is
                                converted to an annuity related to estimated life expectancy at the age of
                                retirement and an assumed “norm” real rate of return (a 1.6-percent
                                increase in real average wages). This means that with increasing life
                                expectancy over time, other things being equal, individuals will have to
                                work longer or accept lower pensions.7 After retirement, benefits are
                                indexed by average wage growth minus the assumed growth norm of 1.6
                                percent. Thus, if real wage growth falls below the norm, the real value of
                                pensions will fall (and vice versa). An automatic balancing mechanism
                                places a further “brake” on the upward indexation of pensions and pension
                                rights if the balance in the pension reserve or buffer fund falls below a
                                certain level.




                                5
                                 The adjustment mechanisms discussed in this paragraph, such as the indexation of
                                benefits to life expectancy and growth of the contribution base, are expected to stabilize
                                the system and keep the contribution rate constant indefinitely.
                                6
                                 The contributions credited to the notional accounts are for bookkeeping purposes only.
                                The actual funds collected are comingled and used to pay current benefits.
                                7
                                 In a simplified form, the pension annuity under the NDC plan is calculated by dividing the
                                notional capital balance at the chosen time of retirement by estimated average (unisex) life
                                expectancy for men and women at the age of retirement: Annuity = Capital/ Life
                                expectancy. As life expectancy increases, members of later generations retiring at the same
                                age and with the same amount of notional capital as members of earlier generations would
                                receive lower pensions.




                                Page 40                                                         GAO-03-307 Older Workers
                         Appendix III: Sweden




Premium Pension          The new Swedish national pension also includes an earnings-related,
                         funded defined contribution plan, the “premium pension,” in which
                         contributions are made to individual financial accounts. Participation in
                         the premium pension is mandatory, but the contribution rate (2.5 percent)
                         is low relative to that of the pay-as-you-go NDC plan. Individuals have a
                         great deal of investment choice (currently about 600 funds), and a default
                         fund is provided for those who decline to make investment fund choices
                         for their accounts. At retirement, these individual accounts may be
                         converted into either fixed or variable annuities.

Guaranteed Pension       In addition to the two earnings-related pensions, the new national pension
                         system also includes a minimum “guaranteed” pension for those with no or
                         low earnings. Unlike the universal basic pension of the old national
                         pension system, the new guaranteed pension provides a means-tested
                         benefit. The guaranteed pension is funded separately from the earnings-
                         related pension; it comes completely out of general revenues. Unlike the
                         earnings-related pensions, individuals may claim benefits under this plan
                         no earlier than age 65. Benefits under this plan are indexed to the
                         Consumer Price Index (CPI), not to average wage growth as in the
                         earnings-related NDC plan.


Employer-Provided Old-   Roughly 90 percent of all workers in Sweden are covered by an employer-
Age Pensions             provided pension plan based on collective agreements between central
                         employer and union organizations. There are four different collectively
                         bargained, employer-provided pension plans: two separate plans for
                         workers in the private sector — one for white-collar workers and one for
                         blue-collar workers and two separate plans for public sector employees,
                         one for central government workers and one for municipal (and county)
                         workers. Traditionally, these pensions have been defined benefit plans,
                         closely linked to and supplementing the national pension.8 And, typically,
                         benefits in these plans have been based on final salaries. During the
                         1990s, however, the plans for private sector blue-collar workers and
                         municipal workers converted to defined contribution plans with
                         contributions paid by the employers.9 In 2003, central government workers
                         will also have a new pension plan containing defined contribution



                         8
                          It is interesting to note that even under the old systems, employer-provided pensions were
                         highly portable across the four plans.
                         9
                          Currently, the contribution rate for private sector blue-collar workers is 3.5 percent of
                         gross pay; for municipal workers it is 4 percent.



                         Page 41                                                           GAO-03-307 Older Workers
                            Appendix III: Sweden




                            features.10 White-collar workers in the private sector, however, continue to
                            have a largely defined benefit plan.


Private (Individual) Old-   Although private pensions remain a relatively small source of retirement
Age Pensions                income in Sweden, there has been an increase in individual retirement
                            saving in recent years. Some analysts attribute this to the increased
                            attention to retirement income associated with the pension reform
                            discussion (and perhaps an increased awareness of financial markets
                            associated with the introduction of the premium pension), and/or
                            concerns about the impact of pension reform on future pensions
                            (especially among women).


Disability Pensions         The most common way for Swedish workers to leave the labor force
                            before the age of 65 has been with a disability pension. Prior to 1991, it
                            was possible to be awarded a disability pension for three reasons: first, on
                            medical grounds, for those aged 16-65; second, on medical and labor
                            market grounds (i.e., due to long-term unemployment), for those aged
                            60-65; or third, on labor market grounds only, for those aged 60-65 who
                            had exhausted their unemployment benefits. Disability pensions granted
                            exclusively for labor market reasons were called “58.3 pensions”: If a
                            worker aged 58 years and 3 months were laid off, he or she could claim
                            unemployment benefits up to age 60, and then claim a disability pension
                            for labor market reasons (until claiming an old-age pension at age
                            65). Eligibility requirements for disability benefits have been tightened in
                            successive reforms throughout the 1990s. The granting of disability
                            pensions exclusively for labor market reasons, for example, was
                            discontinued in 1991, and since 1997 medical reasons are the only valid
                            criteria for granting a disability pension. In addition, as part of the national
                            pension reform, disability insurance was separated administratively from
                            the old age pension system.


                            Active labor market programs for the unemployed play an important role
Labor Market Policies       in Sweden’s labor market policy. These programs have, for the most part,
                            always been open to workers of all ages. The Activity Guarantee program,


                            10
                              The new pension plan for central government workers also includes the option of taking a
                            partial pension beginning at age of 61. There is some concern among pension experts that
                            this plan will encourage workers in this sector to choose part-time over full-time work after
                            age 61.




                            Page 42                                                         GAO-03-307 Older Workers
                       Appendix III: Sweden




                       for example, ensures the long-run unemployed placement in job training
                       and re-employment programs. One-third of the participants are between
                       the ages 55 and 64. Swedish experts and officials argue, however, that
                       existing labor laws, workplace practices, and attitudes may create barriers
                       to continued employment among older people. They also argue that
                       reducing these barriers is increasingly important in Sweden in light of
                       pension reforms that encourage increased labor force participation. Some
                       policy changes have already been implemented in Sweden to reduce these
                       barriers, such as increasing the mandatory retirement age from 65 to
                       67 years. In other areas of concern–such as seniority rules, age
                       discrimination, employment and skills training, quality of work life and
                       attitudes toward older workers—possible policy changes are currently
                       under discussion.


Mandatory Retirement   Prior to the national pension reform, collective agreements in Sweden
                       established a mandatory retirement age of 65. That is, seniority rules (see
                       discussion below) were not applied to workers aged 65 and older, and
                       employers were permitted to terminate employment at that age. In May
                       2001, the Swedish Parliament added a new compulsory rule to the
                       Employment Protection Act, giving all employees the right, but not the
                       obligation, to remain in employment until the age of 67.11 Collective
                       agreements prescribing a mandatory retirement age of 65 are now
                       prohibited, although agreements covering the age at which employees
                       have the right to leave employment and receive a pension are still allowed.
                       Existing agreements prescribing mandatory retirement at age 65 were
                       allowed to remain in place until they expired but no later than December
                       31, 2002.12


Seniority Rules        According to Swedish seniority rules, firms engaged in downsizing their
                       work force must follow the “first-in-last-out” rule, giving priority for
                       continued employment to those who have been employed the longest.
                       Some analysts argue that this protection for older workers helps to explain



                       11
                         Workers over the age of 65, however, continue to lack coverage by unemployment
                       insurance or sick leave insurance.
                       12
                        Reaching an agreement on changing the mandatory retirement age was difficult and
                       required extensive negotiations. The passage of this legislation has also been controversial,
                       with two of the three main trade union confederations arguing that it constituted
                       unwarranted interference by the government in collective bargaining.




                       Page 43                                                         GAO-03-307 Older Workers
                       Appendix III: Sweden




                       the relatively high rate of employment among the 50-64 year old age group.
                       It is also argued, however, that this rule may promote early pensioning in
                       times of downsizing and possibly limit the mobility of older workers. Ways
                       to make seniority rules more flexible, while still offering employment
                       protection, are currently under discussion in the context of policies to
                       encourage older workers.


Age Discrimination     Advocates for older persons in Sweden view age discrimination as a
                       serious impediment facing workers who wish to remain employed later in
                       life. Sweden currently has no legislation against age discrimination in
                       employment. As a member of the European Union, however, Sweden will
                       be required to pass such legislation. In 2000, the European Union
                       established a general framework for equal treatment in employment and
                       requires all member countries to introduce legislation prohibiting
                       discrimination at work on the grounds of age, sexual orientation, religion
                       and belief, and disability. The directive gives member states until 2006 to
                       implement the provisions on age and permits considerable latitude in how
                       the directive is to be implemented in practice.


Training               Overall, the incidence of employment and skills training is relatively high
                       in Sweden, and older workers receive nearly the same amount of training
                       as younger workers. Some researchers and officials, however, believe that
                       the skills of older workers need to be enhanced, particularly those skills
                       necessary for adapting to changing work environments and pursuing
                       second careers. They have concerns that older workers may be
                       disadvantaged in acquiring such skills. It is difficult, for example, for
                       people over 40 years of age to acquire public loans for university studies.
                       There are various proposals to address these problems, including the
                       establishment of special higher education savings accounts to enhance the
                       financing of higher education for people of all age groups.


Quality of Work Life   Swedish researchers report that surveys of older employees in Sweden
                       find many would like to work longer but would prefer different types of
                       jobs and/or fewer hours of work. Thus, government officials and
                       advocates for older workers see “working life” issues—such as the need
                       for more flexible work time arrangements, the ability to switch to more
                       appropriate types of work, and management practices that create a
                       positive environment for older workers—to be critically important.
                       Recommendations to provide older persons with a right to work part-time,
                       to revise labor laws to allow for short-term contracts for older workers,


                       Page 44                                             GAO-03-307 Older Workers
Appendix III: Sweden




and to devise systems to make it easier to change job duties while
employed are under discussion. Negative attitudes toward older workers
are also a concern and are seen to create barriers to the employment of
older people. Surveys find that the majority of employers do not want to
hire older workers. This attitude is attributed to prejudice and
misinformation and/or work rules and practices that make older workers
more expensive. Government officials and advocates argue that
addressing these negative attitudes must be part of any comprehensive
policy change to promote the labor force participation of older people and
must be undertaken in the context of broader policies to promote the
overall well-being of older people in Sweden.




Page 45                                            GAO-03-307 Older Workers
                         Appendix IV: The United Kingdom
Appendix IV: The United Kingdom



United Kingdom
Pensions and Labor
Market Policies
                         Retirement income in the United Kingdom is made up of both government
Old-Age and Disability   and private sources. In the late 1990s, national pension benefits made up
Pensions                 38 percent of the national average wage. The government allows workers
                         to substitute employer-provided pensions or individual pension accounts
                         for the earnings-related portion of national pension benefits, and in the
                         late 1990s, about 75 percent of workers did so. About 60 percent of current
                         pensioners receive benefits from an employer-provided pension, typically
                         defined benefit and providing them with two-thirds of their final salary
                         after 40 years of service. With recent reforms, future pensioners are likely
                         to have more of their retirement income derive from defined contribution
                         employer-provided pensions or individual pension accounts. For low-
                         income pensioners with little or no private pension income, the
                         government provides a larger earnings-related benefit, as well as means-
                         tested benefits. Disability pensions have also been an important source of
                         income for many who leave the labor force prior to becoming eligible for
                         an old-age pension.


The National Old-Age     The United Kingdom’s national pension system consists of three tiers—the
Pension System           state basic pension, an earnings-related pension, and discretionary savings
                         vehicles.

Basic State Pension      The Basic State Pension provides a flat-rate benefit of £75.50 per week for
                         a single pensioner (about $120 per week or about $6,200 per year).1 It is
                         adjusted annually for price inflation. To qualify for the full benefit, male
                         pensioners and female pensioners turning 65 after 2020 must have made
                         44 years of National Insurance Contributions. Female pensioners turning
                         60 before 2010 must have made 39 years of contributions.2 Workers who
                         are not paying contributions because they are unemployed, disabled,
                         caring at home for a child or relative, on state maternity benefits, or are
                         taking training courses may receive credits toward the Basic State


                         1
                         Dollar figures are calculated using an exchange rate of 0.6 U.K. pounds to one U.S. dollar.
                         2
                          From 2010 to 2020, the women’s eligibility age for the national pension system is
                         increasing to 65 to be equal with men’s. Consequently, the number of years of contributions
                         required for women to receive a full state basic pension will also gradually increase.




                         Page 46                                                         GAO-03-307 Older Workers
                        Appendix IV: The United Kingdom




                        Pension. Workers with less than the required number of years of
                        contributions have their state basic pension reduced proportionately, but
                        workers must usually have made at least 10 years of contributions to
                        receive any benefits. In practice, the Basic State Pension is near universal
                        for men. It is becoming universal for women since the enactment of the
                        Home Responsibilities Protection Act in 1978, which allowed those caring
                        for children and people who are sick or disabled to earn credits toward the
                        Basic State Pension so long as they have made 20 years of contributions.

Means-Tested Benefits   Low-income older individuals are eligible for means-tested benefits, one of
                        which is the Minimum Income Guarantee (MIG). The MIG tops up incomes
                        of those age 60 and over with income less than £98.15 per week for a single
                        person (about $158 per week or about $8,200 per year) to those levels.
                        MIG benefits are increased annually with average growth in wages. The
                        MIG does have an earnings test. Each $1 of benefit is withdrawn for each
                        $1 in earnings above the MIG level.

                        In October 2003, the government will replace the MIG with the Pension
                        Credit, in part to reduce the MIG’s earnings test. With the Pension Credit,
                        each $1 of income will lead to a $0.40 decrease in benefits, increasing the
                        worker’s overall income by $0.60. The Pension Credit consists of two
                        elements: (1) a guarantee credit which tops up the income of a single
                        person to £102 per week (about $163 per week or about $8,500 per year)
                        and (2) a savings credit which provides a benefit to those with modest
                        savings, pension income, or earnings. The savings credit is designed to
                        taper away as an individual’s income rises and phases out for individuals
                        with £134.80 of income per week or more (about $216 per week or about
                        $11,200 per year). The eligibility age for the savings credit is currently
                        65. The eligibility age for the guarantee credit is currently 60 but will rise
                        in line with the increase in women’s eligibility age for national pension
                        benefits, so that it will be 65 by 2020.

                        Aside from the MIG, other means-tested benefits include assistance with
                        housing costs and local taxes. About 51 percent of U.K. households over
                        age 60 are eligible for means-tested benefits, although in 2000-2001 only
                        64 percent to 78 percent of eligible households claimed these benefits.3




                        3
                        Eligible households include single males, single females, and couples in which the oldest
                        member is over the age of 60.




                        Page 47                                                        GAO-03-307 Older Workers
                                 Appendix IV: The United Kingdom




Earnings-Related Pension         The earnings-related pension, now called the State Second Pension,
(State Second Pension)           supplements the Basic State Pension but may be substituted by several
                                 types of private pensions. From its creation in 1978 until 1988, the
                                 earnings-related pension (then called the State Earnings Related Pension
                                 System) provided benefits of about 25 percent of workers’ average annual
                                 earnings for the best 20 years. From 1988, benefits have been reduced to a
                                 target of 20 percent of average lifetime earnings. In 2000, a technical
                                 adjustment in computing benefits led to a further reduction. In April
                                 2002, another reform was implemented which resulted in low- and
                                 moderate-income workers receiving higher benefits as a proportion of
                                 wages, while benefits for those with annual income above £24,600 (about
                                 $40,000) benefits remain about the same. In the late 1990s, about
                                 75 percent of covered workers substituted private pensions for the state
                                 earnings-related pension. These private pension plans are either employer-
                                 provided pensions or individual pension accounts called personal
                                 pensions. Personal pensions may be provided through financial
                                 institutions or offered by employers. Employers with five or more
                                 employees who do not offer an employer-sponsored pension must give
                                 workers access to a type of personal pension called a stakeholder pension.
                                 Stakeholder pensions have additional legal requirements, such as a
                                 maximum administrative charge of 1 percent of the pension fund’s value.
                                 In return for forgoing future State Second Pension benefits, individuals
                                 who opt out of the state earnings-related pension for private pensions pay
                                 lower National Insurance Contributions. Those who opt out for individual
                                 pension accounts pay full National Insurance Contributions but receive
                                 part of their contributions back as a rebate that is deposited into their
                                 individual account. Those who opt out of the State Second Pension for
                                 employer-provided pensions pay national insurance contributions at a
                                 reduced rate. Similar to the Basic State Pension, the State Second Pension
                                 allows individuals who are looking after a child under age 6 or an ill or
                                 disabled person to qualify for State Second Pension benefits.

The Discretionary Tier           The third tier consists of additional forms of voluntary savings. First,
                                 individuals can choose to make additional voluntary contributions into
                                 their employer-sponsored pension plan. Second, individuals can choose to
                                 make additional contributions into their personal pensions or stakeholder
                                 pensions. Individuals will receive tax relief for these contributions up to a
                                 certain ceiling. And finally, individuals can choose to make contributions
                                 to a variety of other tax-relieved instruments, such as annuities and life
                                 insurance.

Other Features of the National   Eligibility Age: For the basic and earnings-related pensions, benefits may
Old-Age Pension System           be drawn at age 65 for men and 60 for women. In response to a European


                                 Page 48                                              GAO-03-307 Older Workers
Appendix IV: The United Kingdom




Union directive requiring gender equality in member countries’ pensions
policies, women’s eligibility age will also become 65, with the change
gradually taking place between 2010 and 2020. The U.K.’s national pension
system does not have an early eligibility age.

Earnings Test: The U.K.’s national pension system does not have an
earnings test, meaning that benefits are not offset by the wages earned by
pensioners.

Deferral of Pension Benefits: If pension benefits are drawn past eligibility
age, benefits are increased by an increment of 7.5 percent per year of
deferral. In 2010, the increment will increase to 10.4 percent. The
government is considering pushing up implementation of the increase to
2006. It is also considering allowing individuals a choice between taking
the benefit increase as a lump-sum payment or as increases in each benefit
payment.

Funding: The Basic State Pension and State Second Pension are funded
on a pay-as-you-go basis by National Insurance Contributions shared by
employers and employees. General revenues may also be used to fund
pension benefits. Employers pay 11.8 percent of earnings above a
threshold for employees in the State Second Pension and between
8.3 percent to 10.8 percent for employees who have opted out. Employees
in the State Second Pension pay 10 percent of earnings above a threshold
up to an earnings limit, while employees who have opted out pay
8.4 percent. From April 2003, National Insurance Contribution rates will
increase by 1 percent for employers and employees on earnings above a
threshold. Employees will also pay 1 percent of earnings above the
earnings limit, and the earnings limit will be raised in line with inflation.
National Insurance Contributions also fund other benefits, including
disability, unemployment, and survivors’ benefits.

Sustainability: Changes to the U.K. national pension system, including
raising women’s eligibility age, increasing Basic State Pension benefits in
line with average price increases rather than the higher of increases in
average prices or wages, and making survivors’ benefits less generous, are
helping to maintain the long-term fiscal sustainability of the system. In
1984, the U.K. government projected that the National Insurance
Contribution rate needed to pay for national pension benefit payments
would be 23 percent by the 2020s. Currently, the contribution rate needed
to pay for benefits is estimated to be 18.2 percent by 2020. Pension costs
as a percentage of gross domestic product are projected to remain about
5 percent through 2050.


Page 49                                               GAO-03-307 Older Workers
                         Appendix IV: The United Kingdom




Employer-Provided Old-   Almost half of U.K. workers are members of either defined benefit or
Age Pensions             defined contribution pensions provided by their employers. Employers
                         who offer pensions to their workers may pay lower National Insurance
                         Contributions by having their employees forego rights to benefits from the
                         state earnings-related pension. Employees in these plans also pay lower
                         National Insurance Contributions.

                         Until 1986, employers could only use defined benefit pension plans as a
                         basis for their employees to opt out of the state earnings-related pension,
                         and employers could require employees to join their defined benefit
                         pension plan. The Social Security Act of 1986 allowed employees with
                         either defined benefit or defined contribution employer-provided pensions
                         to opt out and allowed workers to choose whether to join the pension plan
                         provided by their employer. Since then, the U.K. has experienced a
                         movement of employer-provided pensions from defined benefit to defined
                         contribution. In 2000, about 81 percent of employees accruing benefits in
                         employer-provided pension plans were in defined benefit plans provided
                         primarily by large employers. However, of the plans open to new
                         members, about 70 percent were defined contribution. On average,
                         employers and employees make lower rates of contributions to defined
                         contribution plans than defined benefit plans. In 2000, employers
                         contributing to employees’ defined benefit plans contributed 11.1 percent
                         of earnings on average, while employers contributing to defined
                         contribution plans contributed 5.1 percent of earnings on average.
                         Employees contributed 5.0 percent of earnings on average to defined
                         benefit plans, while they contributed 3.4 percent of earnings on average to
                         defined contribution plans.

                         Employers who opt out of the State Second Pension by offering defined
                         benefit pensions are required to provide benefits that are broadly equal to
                         or better than the benefits employees would receive in the State Second
                         Pension. There is no such requirement for defined contribution pensions.
                         Typical defined benefit pensions offer benefits equal to one-eightieth or
                         one-sixtieth of final salary per year of membership in the plan, or half or
                         two-thirds of final salary for workers who have been in the plan for
                         40 years. Typical ages at which workers may draw full pension benefits are
                         60 and 65. The earliest age at which benefits may be drawn is 50.4 All



                         4
                          From the 1970s until the1990s when the U.K. was experiencing economic downturns,
                         employers made use of their pension plans to shrink their workforces by providing
                         generous benefits to encourage workers to retire early.




                         Page 50                                                     GAO-03-307 Older Workers
                       Appendix IV: The United Kingdom




                       private sector defined benefit pensions are fully funded, while some public
                       sector defined benefit pensions are financed on a pay-as-you-go basis.

                       The government has recently announced several proposals for
                       encouraging employers to establish pension plans that encourage longer
                       labor force participation. For example, the government plans to increase
                       the earliest age when workers may begin drawing employer-provided
                       pension benefits to 55 by 2010. The government has also specified some
                       best practices for defined benefit employer-provided pension plans. These
                       include allowing those who work past normal retirement age to continue
                       earning pension rights and to receive a fair benefit increase. In addition,
                       the government is encouraging employers to calculate benefits from the
                       best year’s salary out of the last few years of employment so as not to
                       penalize people who change positions to reduce responsibilities at the end
                       of their career.


Disability Insurance   Disability insurance in the U.K. pays a bi-weekly benefit to adults who
                       cannot work. Currently, recipients age 50 and older number approximately
                       1,175,000 compared with approximately 160,000 recipients of
                       unemployment insurance. During the 1970s and 1980s, the U.K. expanded
                       and improved the coverage of benefits for disabled adults, then tightened
                       them in accordance with the current government’s overall “welfare to
                       work” strategy. Prior to 1971, those unable to work due to disability
                       received means-tested benefits. In 1971–2, the Invalidity Benefit (IVB) was
                       introduced. For those who had a sufficient National Insurance
                       contribution history, IVB provided an age-related income to those who
                       were disabled and not working. Claimant’s age and qualifications could be
                       taken into account in the criteria determining incapacity for work. Cash
                       benefits were not taxed and were indexed to earnings. Benefits generally
                       expanded and improved during the 1970s. However, in 1980, IVB (and all
                       other long-term benefits) indexation was changed to prices rather than
                       earnings, which ultimately provided recipients with smaller benefits. In
                       1995, IVB was replaced by the Incapacity Benefit (IB), at least in part
                       because these benefits were perceived to be subsidizing unemployment
                       and early retirement. The National Insurance contribution element for IB
                       requires contributions from work within the last 2 years, rather than in any
                       previous year. IB also has stricter eligibility criteria, testing if there is any
                       work the claimant could perform regardless of the likelihood of obtaining
                       such a job or its suitability. The assessment of capacity to work can be
                       ongoing rather than a once-only assessment. IB cash benefits, unlike IVB,
                       are taxable. Finally, income over £85 per week from an occupational or



                       Page 51                                                 GAO-03-307 Older Workers
                           Appendix IV: The United Kingdom




                           personal pension, or certain types of health insurance payment will reduce
                           by 50 percent the amount of IB paid to the claimant.


                           The U.K. government has begun a series of reforms that are designed to
Labor Market Policies      increase employment opportunities and increase both incentives and
                           abilities to take on paid work for older workers. These reforms address
                           mandatory retirement and age discrimination, lack of training or skills,
                           and inflexible work and retirement options.


Mandatory Retirement and   Although the U.K. currently allows employers to set mandatory retirement
Age Discrimination         ages for their employees, there have been efforts by the government to
                           encourage employers to extend employment opportunities for older
                           workers voluntarily. The government continues its campaign begun in
                           1993 to promote the benefits of an age-diverse workforce to employers. In
                           1999, the government issued a voluntary Code of Practice on Age
                           Diversity, which sets good practice standards for employers on eliminating
                           age discrimination in their business, in hopes that employers would retain
                           and hire older workers voluntarily. In 2000, the Cabinet Office issued a
                           report5 describing the economic and social reasons for promoting active
                           aging, a concept of improving people’s opportunity to contribute to society
                           and to the economy in their later working years, and laying out a plan of
                           action to encourage active aging. In response, one public employer has
                           raised and some private employers have eliminated their mandatory
                           retirement ages. For example, civil servants in the U.K. were subject to a
                           mandatory retirement age of 60, but now the majority of employees have
                           the option of staying on until age 65. Finally, the U.K. is moving toward
                           enacting legislation against age discrimination in employment, which is
                           required by a recent European Union Council Directive by 2006. Although
                           the government has proposed abolishing mandatory retirement ages, it is
                           not yet known if the legislation will address current legal provisions
                           permitting mandatory retirement policies.


Employment Assistance      The U.K. government offers several types of employment assistance for
                           older workers, including assistance with job searching, training, and
                           employment subsidies through the Department for Work and Pensions



                           5
                            Cabinet Office and Performance and Innovation Unit, Winning the Generation Game
                           (London, United Kingdom, April 2000).




                           Page 52                                                   GAO-03-307 Older Workers
                       Appendix IV: The United Kingdom




                       (DWP). The DWP was created after the last election with the principal aim
                       of implementing the government’s welfare-to-work strategy. In 2002, the
                       government units responsible, separately, for disability insurance and
                       unemployment insurance were combined into the new government unit
                       called Jobcentre Plus, effectively placing services for recipients of
                       disability and unemployment benefits in a single office within the DWP.
                       Jobcentre Plus provides services through local employment assistance
                       centers where all unemployed clients go for assistance seeking jobs. For
                       example, personal advisors assist clients to search for jobs.

                       The New Deal 50 Plus program is one government program specific to
                       older people who want to work. Run through the Jobcentre Plus locations,
                       it offers assistance with job searching, training, and through employment
                       subsidies. This program was piloted in 1999 and went national in
                       2000. Since 1999, over 4,000 people ages 50-64 have received the training
                       grant and over 80,000 have received the employment subsidy. Until April
                       2003, New Deal 50 Plus participants receive the employment subsidy as a
                       cash wage supplement of up to £60 per week if their wages are under
                       £15,000. In April 2003, the cash employment subsidy will become a tax
                       credit for working individuals.


Quality of Work Life   Flexible working options for older workers is acknowledged as an
                       important issue by government officials, representatives of union and
                       employer organizations, and advocates. Despite the interest, employer
                       organizations and government officials contend that a tax rule prohibits
                       the receipt of employer-provided pension benefits while working for that
                       employer. The government has recently proposed changes to this rule.




                       Page 53                                            GAO-03-307 Older Workers
                  Appendix V: GAO Contacts and Staff
Appendix V: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Barbara Bovbjerg, (202) 512-7215
GAO Contacts      Charles Jeszeck, (202) 512-7036
                  Jeffrey Petersen, (415) 904-2175


                  Other contributors to this report include Anthony DeFrank, Anna Laitin,
Acknowledgments   Katharine Leavitt, Janice Peterson, and Yunsian Tai.




(130120)
                  Page 54                                            GAO-03-307 Older Workers
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