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Description
The Study in Brief
Contractual mandatory retirement (CMR) that results from collective agreements and associated pension plans forces many older workers to leave their jobs earlier than they desire. Still permitted in most Canadian provinces, CMR has been perpetuated by economic arguments that the practice serves beneficial functions for employers and their workers. However, this paper shows the economic case for CMR to be deficient on several grounds:
* Proponents say CMR represents voluntary agreements that must bring benefits to both parties. Yet, CMR provisions typically are not agreements between individual workers and their employers but rather the result of collective agreements. Hence, some workers (especially women and recent immigrants) may wish to work longer than the median union voter, but will be constrained by CMR.
* Supporters say CMR allows for deferred compensation programs that bring significant economic benefits in worker loyalty and diligence. It is further asserted that a ban on CMR would be costly to employers in training and monitoring of workers. Yet, jurisdictions that banned CMR many years ago--Manitoba, Quebec, and the United States--have reported none of the predicted adverse consequences.
* Some commentators assert that CMR serves to open up work and promotion opportunities for younger workers. However, this argument runs counter to what economists call the "lump-of-labour" fallacy; a healthy economy is actually limited in its growth by the availability of workers of all ages. Moreover, the looming shortage of skilled workers means that the economy would benefit from extending average working lives.
* The CMR argument ignores the social costs that parties to CMR agreements do not consider, but that are essential to a public-policy perspective. These include the impact of workers retiring earlier than they want to on tax revenues, public pension and health costs, and the economy. With the prospective fiscal stresses from an aging population and shrinking workforce, the impact is a further reason for abolishing CMR.
Current policies permitting CMR are costly to the economy as well as a violation of older workers' human rights. Additional legislative or judicial bans on mandatory retirement would complement other advances in workplace practices and public policies affecting older workers to bring significant benefits to individuals, businesses, and the economy.
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Forced retirement of workers at age 65 results from the terms of many collective agreements and employer pension plans, creating a practice that can be called contractual mandatory retirement (CMR). While no government in Canada requires workers to retire at 65, most provinces continue to permit CMR despite the implicit age discrimination. Policies allowing CMR have been perpetuated through economic arguments about its benefits to employers and workers. This paper takes a critical look at the economic case for CMR and finds its key arguments to be deficient and out of tune with contemporary needs. The paper also examines other workplace practices and public policies affecting older workers and considers reforms that would complement bans on CMR to encourage longer productive working lives.
Within Canada CMR is banned only in Manitoba and Quebec, since 1982 and 1983 respectively, and in 1986 Ottawa outlawed it for federal civil service employment. (1) All the other provinces permit CMR either by limiting coverage of their human rights codes to workers under 65 or by explicitly exempting CMR in their codes (Table 1). (2) In addition, mandatory retirement is allowed for work where age is a "bona fide occupational requirement," such as firefighters and airline pilots. Hence, in parts of Canada an employer can force retirement at age 65 or earlier even without a pension plan or collective agreement, while in other jurisdictions such provisions must exist to justify CMR. Most recently the issue arose in Ontario, where the former government drafted a bill to ban CMR, and the new Liberal administration has pledged to proceed. (3) The United States, Australia, and New Zealand have already banned CMR.
Economic analysis has been developed to explain the CMR phenomenon and to show the benefits that potentially arise for employers and workers from such agreements (see Lazear, 1979; Pesando, 1979). In essence, a company offers a pattern of wages and pension benefits that underpays its workers during early years, relative to their productivity, and overpays them during later years. This system, known as deferred compensation, provides incentives for employees to stay with companies for a long time, participate in training, and apply themselves diligently at work. It also enables employers to invest in workers' job-specific skills with some assurance they will stay long enough for the companies to reap the returns, and it reduces employers' costs of job turn-over, hiring, training, and worker monitoring. (4) Proponents argue that by placing a cap on the period of overpayments, CMR facilitates more efficient agreements. Moreover, CMR gives employers a non-disputatious means of terminating workers with declining productivity at age 65. Since CMR is a voluntary agreement between the employer and its workers, everyone must be better off, and it is hard to see why there is a public interest in banning such arrangements.
At first blush, the economic rationale for CMR appears seductively attractive, but on further scrutiny its blemishes appear. The CMR argument has major deficiencies in three areas. First, the analysis assumes that CMR can properly be characterized as voluntary, utility-enhancing agreements among companies and workers. Second, the CMR argument asserts that the practice brings significant economic benefits and that banning it would sacrifice those benefits. Third, the analysis ignores the social costs of CMR that parties to such agreements do not consider, but that are essential to the public policy perspective. This paper examines each of these areas and finds the CMR argument to be fundamentally flawed. A ban on CMR would both eliminate age discrimination and bring economic and fiscal benefits. Such a ban would also complement other public policy and employer changes to encourage longer working lives, and this paper thus considers several closely related issues for older workers.
Behavioural Assumptions of CMR
A key assumption of the CMR analysis is that all agreements for retirement at 65 are fully consensual among the parties concerned. (5) In the words of one supporter, CMR is "part of a private contracting arrangement between consenting parties ... mutually agreed to by employers and employees who generally have considerable individual or collective bargaining power" (Gunderson, 2004, pp. 2-3). That consensual characterization might be accurate if all agreements were between an individual employee and the employer, such as the employment contract of an executive that specifies a termination date or age. However, almost all workers subject to CMR are covered by collective agreements rather than individual contracts. The linkage between CMR and pension plans, most often found in unionized workplaces, is also very strong. In a sample of older workers from the U.S., 62 percent of workers with a pension plan had CMR, and 86 percent of those with CMR had a pension plan (Lazear, 1979, p. 1281). In Canada, CMR is highly concentrated in work covered by collective agreements or formal personnel policies, not individual contracts (Gunderson and Pesando, 1988, p. 33).
When an organization like a trade union mediates between the wishes of employees and those of the employer, the consensual nature of the relationship for the individual worker weakens. The union organizers may have a preference for mandatory retirement, perhaps as a way of opening positions for younger workers. Even if the union's leadership is fully responsive to its members, it will follow the preferences of its median voters. With respect to any issue, including the imposition of mandatory retirement, the union cannot satisfy the tastes of all its members. Those who would prefer to work beyond 65, typically a minority, are compelled to accept the terms negotiated for all members of the union at that establishment.
One might argue that workers who anticipate that they will want to continue working beyond 65 should simply find a job with a non-union employer or one that does not practice CMR. Yet, they may work in an industry or occupation that is universally unionized, or they may work in a locale where there is a dominant unionized employer. Should such workers be expected to change their industry occupation, or residence in order to find employment that does not bind them to retire at 65? That kind of mobility may impose large costs on individuals in terms of retraining or relocation or loss of work by a spouse. And taking work that is not unionized entails a loss of wages and fringe benefits in most occupations.
Moreover, some groups may have a stronger preference for working beyond 65 than the average worker. (6) For example, women who have entered the labour force relatively late, after raising children or marriage breakdown, as well as recent immigrants may wish to work until later ages than typical non-immigrant male workers. These groups may have to work until a later age to qualify for larger pension benefits based on years of service, or they may need additional work years to save for their retirement. These concerns are of particular salience to women workers with their longer life expectancies. To the extent that these workers are employed alongside typical male workers who favour CMR, their ability to choose is constrained. (7) It is telling that both the women justices took the minority side in the Supreme Court's landmark 1990 decisions on CMR. They alone supported the elimination of mandatory retirement and observed that:
women workers are unable to amass adequate pension earnings during their working years because of the high incidence of interrupted work histories due to child-bearing and child-rearing. Thus, the imposition of mandatory retirement raises not only issues of age discrimination but also may implicate other rights as well [that is, sex discrimination]. (8)
Even if all CMR were clearly based on consensual agreements between individuals and their employers, one might question the ability of most people to predict their situation and needs many years into the future. (9) Most workers in their 30s and 40s find it hazardous to forecast their financial or health status or even marital and dependency status at 65. Many who might, at a younger age, like to retire at 65 will find that when they reach that age their circumstances are quite different than anticipated. For example, some workers will find that they are far short of their lifetime savings goals on account of marital dissolution, child support payments, the costs of second families, or simply poor... |
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