Chapter 2 Work and retirement: A governance challenge

Bibliography

A number of developments over the past few decades have transformed the perspectives in good currency about work and retirement. This has led several OECD countries to review their policies about retirement age and related entitlements and obligations.

Half a century ago, working conditions were generally harsh, life expectation was hovering around 65, and retirement was generally experienced as complete withdrawal from productive activity for a short period of rest and leisure at the end of one's life. The passage to a knowledge-based economy in which work does not necessarily entail harsh physical activity, the improvement in health conditions and the increase of life expectation by more than a decade, and the sharp drop in fertility and the consequent decline in the size of the replacement cohort, have modified the rules of the game.

Persons reaching the traditional retirement age have now a long life ahead of them, and will consume a great quantity and a wide variety of supporting services. Yet they are not only consumers: they remain a productive asset, and are now physically and mentally able to remain involved in productive activities, and they are often willing to do so. This is not unimportant to note since the cohort of young persons meant to replace them in the labor market has been shrinking dramatically.

This raises a number of important questions about the governance of work and retirement. Governance may be defined as effective coordination when power, resources and information are widely distributed. The world of work and retirement is one where nobody is in charge. A large number of decisions by persons, firms and governments are shaping this world. Good governance depends on the alignment or the goodness-of-fit of all these decisions.

In the face of imminent labor shortage, of difficulties to ensure appropriate income support for the retired, of important productivity slowdowns, and of frustrated older persons prevented from continuing to be as active as they would like, one must reconsider a number of aspects of the world of work and retirement.

What period of one's life should be dedicated to work and to retirement? What is the role of social policy in ensuring the appropriate blending of work and retirement according to circumstances? What should govern decisions about the age of retirement? What is likely to drive retirement politics in different countries? How can one improve the coordination of decision-making so as to ensure a satisfactory well-being for the retirees, the productivity of firms, and as much individual self-reliance as possible? To what extent do we have to reconsider the division of labor among the private, public and social sectors in ensuring that these objectives are realized? To what extent do we have to reconsider our present social policies to meet these objectives?

While all these questions will raise a number of financial and economic issues, one should also factor in the important contribution of the "cohort of retirees" to family and inter-generational solidarities.

These are the basic questions addressed in the first section of this book.

Claude Castonguay underlines the main demographic and economic factors explaining the new perspectives on retirement, and the moral responsibility of the baby-boomers not to burden smaller future cohorts with an enormous public debt ascribable to their massive needs in retirement. This will require a cultural change, and cannot be done without all the stakeholders recognizing that they will have to work together and take into account in their decisions the interests of the next generations. Such debates should entail a modification of the funding structure of retirement income, and a new covenant among the partners in the world of work.

Anne-Marie Guillemard tackles the management of the age-work interface, and analyzes how different countries have elected diverse strategies of governance on this front. She identifies different "cultures des âges" and "polices des âges" and various mixes of policy instruments and public policies that tend either to marginalize older workers, or to maintain, integrate, or re-integrate them into the workforce. The governance challenge here has to do with the stakeholders' capacity to invent ways collectively to ensure that ours are "societies for all ages".

Agnès Pitrou reminds us that culture is not only about work and money, and that other dimensions need to be taken into account. Citizens do not choose their age of retirement. This is a decision significantly shaped by the nature and richness of the pension schemes, but also by the nature of family responsibilities. Retirement provides an opportunity for retirees to contribute in a fundamental way to the social production of solidarities within the family and between generations. This contribution is often occluded, and the social costs of extending the work life are often not properly computed. One should factor in the central role of the older generation in the social production of solidarities that are yielding important social and economic benefits.

John Myles examines the shift in the political terrain that has accompanied the broadening of perspective on work and retirement. He explains why the pressures for reform in pension schemes were relatively less important in Canada than elsewhere: there was less fiscal pressure or prospect of having to raise payroll taxes inordinately, little evidence of gross inter-group and intergenerational inequity, and the federal system has always found it difficult to generate a consensus on cutbacks. But the terrain of dispute is shifting in Canada as elsewhere. As the ratio of consumers to producers, associated with population aging and low fertility, increases, the new focus of discussion is not on pensions, but on the cost of supporting the retired population. This in turn broadens the debate, as this burden is shown to depend as much on the employment level and productivity as on the number of retirees and their consumption level. Concentrating too exclusively on the last of these four factors is unduly reductive.

The complex of demographic and economic forces at play, the cultural and social constraints in place, and the political difficulties in reaching any consensus on work/retirement issues have created many a stalemate in different countries. Simplistic mechanical top-down policies proved all but impossible to legislate. Consequently, the different stakeholders will be forced into all sorts of bricolage (tinkering) in response to particular circumstances and special configurations of pressures. This bricolage may emerge from difficulties more sharply felt in one of the private, public or social sectors, and therefore be the result of initiatives taken more or less independently by decision-makers in the private, public or social sectors. Of necessity, this erodes the pure role of institutions that may have been originally designed to achieve one or another of the three basic objectives - poverty reduction of retirees, productivity of firms and promotion of self-reliance. Institutional métissage ensues as values and objectives get blurred in the activities of different institutions.

The last two papers (Rein and Thacher, Li) focus on the broad trade-offs that confront policy-makers, as well as private and social actors, in designing retirement income schemes that try to achieve the three objectives. In most countries, each of these objectives or guiding values was originally embedded in different pillar institutions. In Canada one might identify OAS/CPP, private pension plans and RRSP with these different pillars: the first are aimed at poverty-reduction, the second are part of the compensation packages of firms dedicated to generating as much productivity as can be achieved, and the third are geared to stimulating personal saving during the working life.

Rein and Thacher recognize the centrality of the art of separation among institutions in pursuit of different values, but also acknowledge that the separation cannot be as tight in practice as one might like it to be in theory. There are linkages of complementarity and substitution among these pillars, and much blurring in the distinction among them as a result of pressures from the evolving context, the change in the values priorities, and the bricolage of the different actors. These concepts are used by Rein and Thacher to X-ray the retirement income schemes of Australia, the Netherlands and the United States, and to identify the ways in which they have evolved by separation, linkages and blurring. Li applies the same analytical scheme to Canada, and finds that change through blurring is indeed the only plausible option.

The world of work and retirement is a complex adaptive system. Its shape, foci and governance echo the culture and the values of each particular socio-economy, and evolve with them. The demographic and economic forces at play in the early twenty-first century are forcing the system to adjust everywhere, but the configuration of pressures and the texture of values, culture and sensitivities differ from country to country. So each country adapts differently. But it is fair to say that, generally, the social agenda of all countries has drifted, as John Myles suggests, from pure "pensions politics" to more encompassing "retirement politics", and has given a new centrality to the governance of the work-retirement interface.

The governance of the work-retirement interface entails some re-tooling, some re-structuring and some re-framing, and this cannot successfully emerge without all the stakeholders finding ways to discuss and debate these issues in a common public space. Claude Castonguay has called for such a debate. Yet it would be naïve to expect that such a process will emerge organically or will neatly generate a simple "technical" solution. Solutionists are utopians. The governance of the work-retirement interface poses profound "political" challenges: puzzles have solutions, governance challenges only elicit responses. These responses will come from all the stakeholders and may not necessarily fall into "regular" patterns. This is why one can only expect baroque governance in this world of work and retirement.

Baroque or irregular governance does not however mean bad governance. The requirement to take into account a vast array of particular circumstances, different values systems, different cultures, and a great variety of political regimes will only ensure that a vast array of patterns and modes of governance of the work-retirement interface will ensue.

It is worth noting that some modest general propositions about the drift in the governance of the work-retirement interface have emerged from the papers in this section:

1. The new battlefield is likely to generate a new division of labor among the government, the employers and the individual citizens in shaping both the worlds of work and retirement income. While one may not see a major retrenchment of governments on the retirement income front, it is likely that employers will be the main drivers in redefining the world of work away from the marginalization of older workers.
2. A most thorny issue to be debated is the regulatory framework of the labor market, and the need to involve labor unions and other such organizations in the transformation of the labor market framework to make it less rigid and inflexible.
3. One can envisage that in the post-welfare-state world, a less state-centric governance is likely to increase the importance of the individual's self-reliance in ensuring adequate income in retirement.
4. It is unlikely that any reform in the governance of the work-retirement interface will be accomplished without more blurring of the roles of the different institutions, and without more explicit debates about the linkages among them; so institutional métissage is bound to grow.
5. Concerns about adequacy and fairness of retirement income will likely lead to an examination of the linkages among the different pillars of the retirement income system and their particular instruments. This examination could involve some sort of forum on work and retirement in which all the stakeholders will participate.

The concerns just cited have already stimulated a focus on retirement-related policies in several OECD countries. In Canada, the concerns are likely to trigger debates and policy deliberations across three fronts as a result of the broad forces sketched in the different chapters of this part of the book: (1) lengthening of working life and raising employability for older workers, (2) diversifying the sources of retirement income, and (3) productivity growth in the health and long term care services provided to the aged and the containment of drug costs.

Lengthening of working life and raising employability for older workers entail the elimination of incentives to early retirement and the development of ways to enhance job opportunities for older workers. In Canada, over 50% of the older workers (55 to 64) are employed; in some European countries it is 25% or below. Issues in this area include rigidities in the regulation of labour markets, integration of older workers in the workplace through more flexible arrangements, the lengthening of the contribution period for full pension benefits, increasing the age of entitlement to full pension and the lower age limit for early retirement, and relaxation of rules about mixing pension earnings with income from paid work.

Diversifying the sources of retirement income entails making fuller use of the so-called "three-pillar" approach where retirees have three sources of pension income: public pay-as-you-go pensions, employment-related funded pension plans, and voluntary retirement savings. Concern in this area will trigger examination of the balance among the flows of income from the three pillars.

Many countries have begun to shift their public pension scheme to a fully funded capitalization system and pressed for the development of compulsory employment-related fully funded pension schemes while encouraging, through tax incentives, the voluntary retirement savings of private citizens. Such diversification and increase in funded pension schemes require modifications in financial structures and taxation systems, and entail important transition costs especially in terms of intergenerational equity since as one shifts to funded schemes current workers will be hit twice - having to pay for the pensions of those currently retired and again for their own. This means that one must expect this transition to be slow.

As regards productivity growth in the health and long term care services provided to the aged and the containment of drug costs, it is well known that health care costs rise steeply when advanced age is reached. For persons over 85 years of age, the per capita health care resources is almost 10 times more than for young persons; for prescription drugs, the consumption by the aged is three times more than their share of the population.

With the continuing rapid growth of the more senior sub-set of the older population, we can expect profound review of the ways in which such health and long-term care services are delivered.

This is not a new problem and aging is not its sole cause: aging only exacerbates what is a critical challenge for all modern socio-economies.

Our hope is that this section of the book will provide the reader with a good appreciation of the major dimensions of the work-retirement problem, of the ways in which the debates about it point to a change in the nature of the governance, and some outillage mental to help make sense of the process that is at work in bringing forth this new pattern of governance.

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Bibliography

Giuliano Bonoli and Toshimitsu Shinkawa (eds.). 2005. Ageing and Pension Reform around the World. Cheltenham. Edward Elgar.

Gilles Paquet. 2005a. Gouvernance : une invitation à la subversion. Montréal. Liber.

Gilles Paquet. 2005b. The New Geo-Governance: A Baroque Approach. Ottawa. The University of Ottawa Press.

Gilles Paquet. 2004. Pathologies de gouvernance. Montréal. Liber.

Horst Siebert (ed.). 2002. Economic Policy for Aging Societies. Heidelberg. Springer-Verlag Berlin.