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Working Beyond Pensionable Age

A new study of IDEA written by Jiri Satava. What is the right retirement age? And what institutional incentives do we have for elderly people who are able and willing to work after they reach their retirement age? The new study "Working Beyond Pensionable Age: Institutional Incentives in  the Czech Republic" offers overall analysis of the current situation in the Czech Republic.

The Czech Republic has reacted to its deteriorating demographic situation mainly by increasing the statutory retirement age. This raises the ratio of workers to pensioners because healthy individuals are used to working until they reach the statutory retirement age. This policy does not, however, help to increase the low level of employment among Czech pensioners.

The vast majority of pensioners are voluntarily inactive. Seventy to eighty percent of retirees report that they left the labour market voluntarily. The majority did not suffer from health problems or difficulty finding a job at the time of retirement. Moreover, an increase in the share of individuals limited to work during several years before statutory retirement age cannot explain the sudden exit of almost whole cohorts to inactivity. 

Institutional incentives for the pensioners to work, via the tax, benefit or pension systems could contribute to an increase in employment among pensioners because the vast majority of pensioners are able to work, but these institutions do not currently provide such incentives, which would offset pensioners' increased temptation to leave labour market (caused by guaranteed unconditional income - old age pension). Tax, benefit or pension system changes could increase pensioners' net working income, which would incentivize them to work.

In this study, institutional incentives for the elderly to work are quantified by participation tax rate. All specifications of participation tax rate, which do not take into account unemployment benefits, show, that institutional incentives for the elderly to work are not higher compared to incentives for prime age individuals to work. Moreover, participation tax rates of pensioners used to be even higher compared to prime age individuals. This was the case in 2013 when working pensioners, who were receiving an old age pension, could not claim taxpayer tax credit. Therefore, pensioners' institutional incentives to work cannot offset their increased temptation to leave labour market.

A higher level of employment among the elderly is beneficial for the elderly and for the whole population, because it raises public revenues through an increase in direct tax, social security and health care contributions and other tax revenues. An international comparison shows that it is possible to increase employment among old age pensioners by more than 20 percentage points. According to our simulation, a 10 percentage point increase in employment, driven by significant institutional incentives for the elderly to work, would raise public revenue by 0.3 % to 1.5 %.