Wealthy elderly benefit most from ’generation pact’

Ensuring a healthy transition into retirement for older individuals and enhancing career opportunities for the younger workforce: a ’generation pact’ allows employees to reduce their working hours once they reach a certain age. The aim is to prevent older workers from dropping out before reaching retirement while creating room for newcomers in the job market. However, recent doctoral research by Albert Rutten reveals that wealthy seniors are the primary beneficiaries of this arrangement, leaving the less well-off and the young with little to gain.

Since 2014, collective labor agreements in the Netherlands have included provisions for so-called ’generation pact’ arrangements. This pact essentially enables older employees to transition into a kind of part-time early retirement in the final years of their careers, allowing them to gradually reduce their working hours on highly attractive terms. The goal is to help the elderly to reach retirement in good health while simultaneously opening up opportunities for new entrants to the job market.

Does the measure succeed in distributing work more fairly between the young and old? Economist Albert Rutten recently defended his doctoral thesis Essays on Work and Retirement at Tilburg University. Together with his supervisors DaniŽl van Vuuren and Marike Knoef, he examined the effects of the generation pact in over thirty Dutch municipalities.

The researchers’ conclusion: the pact doesn’t work for everyone. Wealthy seniors benefit from the arrangement, but the generation pact doesn’t do much for elderly workers with lower incomes or for young people.

Limited benefits for the young and the less well-off

In theory, the generation pact could address two major societal challenges: an aging population and limited career opportunities for new entrants. But the reality is more complex. In practice, the less well-off are not reaping the benefits. The wealthy are taking advantage of the pact, while workers with physically demanding occupations and lower wages would stand to benefit most from reduced work pressure in the final years of their careers.

The intended positive impact on the career prospects of young workers is also absent: the generation pact does not lead to increased employment for new entrants, nor does it accelerate their climb up the career ladder.

How useful is the generation pact?

While the labor participation of well-off elderly employees sees a slight increase because of the generation pact, the employment effects are very limited. How valuable are generation pact arrangements if the wealthy make use of them, while vulnerable groups in the job market derive little or no benefit?

"If we consider the policy motivation, we must indeed conclude that the goals are only partially achieved," says Albert Rutten. "At the same time, the generation pact can contribute to a support base among large groups of older individuals to continue to work for as long as possible. Such support is not easily quantifiable in a cost-benefit analysis but is crucial for policymakers to consider."