European countries’ pension reforms over the past two decades have played a “decisive role” in driving up the participation rate of older workers in the labour force, a new report by the European Central Bank (ECB) has found.

The ECB’s paper, Drivers of rising labour force participation – the role of pension reforms, by Katalin Bodnár and Carolin Nerlich looked into the drivers behind the “considerable increase” of older workers over the past two decades, particularly among women.

It said other factors such as better health conditions, rising life expectancy and higher education levels are long-term trends and therefor cannot explain the steep increase in the participation rate since 2000. However, pension reforms “seem to have played a decisive role in driving the participation rate up”.

“They comprise increases in the statutory retirement age, more flexible retirement arrangements to combine work and retirement, financial incentives for prolonging working lives beyond the statutory retirement age, less generous (early) retirement schemes and stricter eligibility criteria for retiring earlier, for instance due to an increase in the contributory years required,” the report stated.

The report noted that the reforms, seen across many European countries, have incentivised older workers to retire later.

Looking into the future, the report said that to further contain fiscal sustainability risks related to population ageing, governments would need to pursue further pension reforms with a potentially positive impact on the labour force participation rate of older workers. However, the report warned that the reversal of some pension reforms could have an adverse affect of older works in the labour market.

“More recently, several countries are contemplating whether to reverse previously adopted pension reforms, in view of rising political pressure. In a few countries, such steps have indeed already been decided.

“However, as recent research has shown, undoing past pension reforms would not only pose challenges for fiscal sustainability, but would also generate substantial adverse macroeconomic costs, including for the labour supply. Thus, if this trend of reform reversals continues, it is likely to result in a declining participation rate of older workers,” the ECB warned.

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