Hartz Reforms - Limitations to Early Retirement Reasonable

The German government tries to combat growing unemployment by introducing the so-called "Hartz laws" (a labour market reform package). It remains to be seen whether these measure will be successful - some of them have not yet entered into force. Recent examinations by the Centre for European Economic Research (ZEW), Mannheim, suggest that the adopted tightening of early retirement rules for elderly employees is a particularly promising tool to notably reduce unemployment.

The ZEW study analyses the development of West German unemployment rates of the past 25 years and is based on representative data bases covering several hundred thousand observations. The evaluation of the the data stocks shows that the unemployment period among younger workers in West Germany has declined over the past decades. However, the unemployment period of older employees as well as the corresponding unemployment rate has surged. One major reason is that many elderly unemployed people have drawn on their companies' early retirement programmes. Due to the early retirement rules introduced in the 1980s, a large number of long-term employment contracts with mandatory social security contributions were scrapped turning existing contributors into unemployed people. That exerts great pressure on the unemployment insurance system, health care, and retirement funds, which, in turn, increases additional labour costs.

The sanctions entering into force as part of the Hartz laws will especially affect young unemployed people even though unemployment rates have surged among the group of over 55-year-olds due to early retirement. The federal government would be wise to restrict early retirement options for elderly workers and reduce their growing unemployment numbers.

Limiting early retirement pays off notably - just consider Finland, where in 1997 the government shortened the period of entitlement to unemployment benefits.  The results of the ZEW study suggest that this reform significantly lowered the unemployment risk and period of those older employees affected, and eased the pressure on unemployment insurance.

What lessons can we draw from the Finnish experiences? In Germany, unemployed people not only benefit from the long maximum period of entitlement to unemployment benefits, but also, at the age of 59, have the opportunity to obtain simplified access to unemployment pay until retirement, in accordance with § 428 of the Social Code (Sozialgesetzbuch III, SGB III), as long as they agree not to look for another job. From the beginning of 2006 onwards, § 428 SGB III will largely cease to apply. The Hartz laws will limit the entitlement period of over 55-year olds from a maximum of 32 months to a maximum of 18 months. The results from Finland indicate that these changes will notably curb rising unemployment among the elderly and ease the strain on the unemployment insurance system. However, this relief will not happen over night. It will rather take several years, since workers on early retirement will not retroactively lose their entitlements before 2006. Consequently, this group of unemployed elderly will continue to receive benefits from the Federal Employment Agency until 2012, i. e. when they will reach the age of 65.

Contact

Dr. Ralf Wilke, Phone: +49(0)621/1235-131, E-mail: wilke@zew.de