Reform and retirement: pension lessons from Finland

Pension reform is taking place in countries around the world. Governments, businesses and individuals have gradually come to terms with the fact that one of the consequences of us all living longer is that existing pension arrangements are unsustainable. As a result, millions of workers are being encouraged, nudged or, in some cases, forced to work longer. But what if reforms don’t work or have a different impact from that intended? Tarani Chandola from the ESRC International Centre for Lifecourse Studies and University of Manchester has been analysing the complex interplay between pension reform and our health and their combined effect on the timing of retirement.

We all need to work longer and retire later! Those are the essential messages coming from Governments around the globe. Turning those messages into concrete change that can make pension systems sustainable, however, is no straightforward matter, especially when you take into account the health problems that older workers can face.

The combined impact of pension age policies and our health on our decision to retire and the complex way those things play out are not very well understood. Many people stop workingbecause or ill health or caring responsibilities. Changes in the age when people can claim their state pension, which is increasing in the UK, could deter people from retiring when they perceive they need or want to.

Our research took a close look at pension reforms introduced in Finland in 2005, where, in place of a fixed statutory retirement age of 65, workers were given the choice of retiring between the ages of 63-68. The central goal of the reform was to ensure the sustainability of the pension system and to promote longer working lives. To try to get more people retiring at the top end of that age range, financial incentives were introduced for those who opted to retire later.

We looked at people who retired before and after the reforms to see whether the changes to the system had the desired effect of getting people to work longer. We also wanted to see if people who opted for early retirement (between the ages of 63-64) tended to be in better or poorer health.

Health issues linked to retirement

Our research made use of information from the medical and retirement records of more than 20,000 men and women born over a 9 year period. As far as their health was concerned, we focused on issues most closely linked with retirement such as circulatory disease and bone and muscular problems like arthritis as well as mental health problems. We were also able to access records of the sorts and quantities of prescription medicines that people were taking in the run up to retirement.

Looking at the pre-reform group, there was a clear decreasing trend in retirement by age 63 and by age 64. Among the post-reform group, there was no clear trend, but each birth cohort was substantially more likely to have retired by the age of 64 than those in the pre-reform cohorts. In fact, workers subject to the new system were 50% more likely to retire age 63-64 than those in the old.

Although retirement was generally more common among people with poorer health, as we thought would be the case, it was striking that the increased numbers of people retiring early in the post reform group tended to have better health.

In short, the reform encouraged more people to retire earlier. Those in poor health were just as likely as before to retire early, but among people with better circulatory, muscular, bone and mental health, retirement at 63-64 increased substantially. Even when we took a range of other factors into account, such as their social and economic circumstances and their education, their good health was a strong predictor of retirement.

Unintended consequences

A more flexible retirement age, in Finland’s case, has had the unintended consequence of encouraging more, not less people into early retirement. Many of those were people in good health, the sorts of workers who might have several healthy working years ahead of them – the sorts of people the Finnish Government would have hoped would retire later.

Further reform is already on the cards for Finland in 2017 and is likely to see the lower age of statutory retirement raised to 65 and after that linked to life expectancy.

Here in the UK, we have seen the raising of the State Pension Age to 67 for men and 65 for women with further changes slated for the future. Only time will tell if it has the desired effect of keeping people who otherwise might have retired earlier in work or whether other factors, such as an individual’s health will play a stronger role in those decisions.

Our study shows that, regardless of what is happening with pension reform and policy, those in poorer health are unlikely to be able to extend their working lives no matter what, something Governments everywhere need to build into their thinking about pension reform.