Late-career Risks in Changing Welfare States by Jan Paul Heisig

Part I
 Background

1 Introduction
 Industrialized societies are undergoing dramatic demographic changes. As 
a result of growing life expectancy and low fertility rates, all countries are 
experiencing declines in the size of the working-age relative to the older popu-
lation: The so-called ‘elderly dependency ratio’ is increasing. The consequences 
of these demographic changes extend far beyond the economic realm, but one 
of their most serious and best understood implications is that they threaten 
the solvency of public pay-as-you-go (payg) pension schemes. Potential labor 
shortages are another scenario troubling policymakers and employers alike.
 Across industrialized countries, policymakers are therefore seeking to 
raise employment levels, and older workers in their 50s and 60s are one 
population group that is receiving considerable attention in this context. 
This is especially true in many Continental European countries which even 
until the 1990s actively promoted early retirement as a means of reducing 
labor supply and thereby unemployment (Kohli et al. 1991; Ebbinghaus 
2006). While preventive policies such as health promotion and lifelong 
learning also have their place, at least in theory, cutbacks in (early) retire-
ment benefits are a straightforward way of improving the sustainability of 
payg schemes. Lower retirement benefits not only directly reduce pension 
outlays; they should also induce individuals to postpone retirement and 
remain in the labor force, thereby increasing labor supply, tax revenue, and 
contributions to public insurance schemes.
 Reforms intended to raise employment levels have not been confined to 
public pension schemes. Other key welfare state programs such as unem-
ployment insurance and disability benefits also underwent major reforms 
in many advanced countries during recent decades, with the ‘activation’ 
of older workers and other groups such as single mothers and the long-
term unemployed being a top priority. Generally speaking, this goal has 
been pursued through a combination of ‘enabling’ and ‘demanding’ policy 
changes (Eichhorst et al. 2008; Eichhorst and Konle-Seidel 2008): Enabling 
reforms include the expansion of active labor market policies such as train-
ing measures, policies facilitating the reconciliation of paid and care work, 
and instruments that seek to raise the net gain from working such as wage 
subsidies or negative income taxation. Examples of demanding reforms are 
the tightening of readiness-to-work requirements and suitability criteria 
or cuts in the level and duration of benefits.
 One possible interpretation of these changes is that they reflect neces-
sary and inevitable responses to demographic changes and other challenges

Late-career Risks in Changing Welfare States by Jan Paul Heisig