Yet, despite the current rise in unemployment , there is no sign of governments reverting to the practice.

“On the contrary, some members have introduced measures specifically to prevent early retirement,” said Georg Fischer, head of the Social Protection and Social Services Unit at the European Commission. He attributed the change to “the aging challenge finally being understood by policy-makers.”

The euro area’s unemployment rate was 9.4% in June, up from 7.5% a year before. Yet, large variations exist among EU members. For example, in Spain and Ireland, construction boomed and then collapsed spectacularly. Unemployment in Spain is now at a 10-year high after the jobless rate rose from 11% in June 2008 to 18.1% in June 2009, according to Eurostat.

Age shock complicates solutions to unemployment. During economic downturns in the 1970s and 1980s, Spanish policies encouraged an early exit from the labor market. The result was that the average retirement age fell from 68 in 1950 to 62 in 1995. Yet, Spain also faces the most severe demographic challenges in Europe. The old-age dependency ratio is projected to rise from 24 in 2005 to 67 by 2050. (The EU average is forecast to be 52) placing its generous public pension under acute pressure.

Although other European countries, such as Germany and the Netherlands, have recently postponed the age of retirement until 67, Spain seems unwilling to follow suit. Instead, Labor Minister Celestino Corbacho has highlighted the need to “end the early- retirement culture.” Like other European countries, Spain is addressing unemployment by keeping people working rather than forcing them out of the labor force. As one measure, similar to Sweden, the government recently temporarily cut social insurance contributions to reduce labor costs.

Yet, as the world is undergoing its biggest increase in unemployment in decades, governments are under pressure to find a solution. Speaking at a conference on private pensions systems in the central and eastern European countries, Fischer commented that while early retirement may be expedient, regulators have realized they cannot continue to put a heavy fiscal burden on future generations.

“The temptation is to use early retirement as part of a solution, but we strongly advise against it because it involves significant long-term costs. Fortunately, we have seen no sign of this occurring, and really there is no going back. It would mean putting a substantial debt burden on the shoulders of our grandchildren.”

In addition to Spain, Austria, Denmark, France, Germany, Hungary and Italy are among countries where moves are aimed at keeping people in employment rather than forcing them out. Different approaches include encouraging firms to shorten workweeks rather than lay people off or topping up the pay of workers on short hours. 

Published by PROJECT M in September 2009