Impact of new labour market risks on their future pensions

VS – 03/2023

The reforms of the pension systems as well as the changes in the world of work are the subject of many analyses and publications. However, there is little research on how the labour market risks of young people and the pension reforms of recent years affect their old-age security. The joint discussion of the two processes is the subject of the publication "Youth Employment Insecurity and Pension Adequacy".

Young adults – losers of globalisation

Globalisation is accompanied by increasing demands for more flexible forms of work. In particular, workers beyond the core workforce are facing ever greater demands for flexibility. This also includes young workers. These increasingly pursue atypical employment, for example in the form of platform work or fixed-term employment. Their employment situation has also become increasingly insecure. For example, the share of temporary employment has increased in recent years and the unemployment risk of young adults has remained at a high, far above average level since the economic and financial crisis.

Pension reform trend towards greater equivalence in contributions

The authors emphasise that most state income-based pension systems are designed to provide full, adequate pension benefits only in the case of uninterrupted, predominantly full-time employment throughout working life. As a result of the challenges of demographic change, equivalence in contribution, i.e. the relationship between pension contributions and pension benefits, has been strengthened over the entire employment phase in most European countries in recent years. These reforms have also been explicitly implemented with the aim of creating incentives for a higher labour force participation of older people and women. On the contrary, periods of atypical or fixed-term employment and unemployment have an increasingly negative impact on future pension entitlements as a result of these reforms.

This development is accompanied by the expansion of multi-pillar systems. The standard of living of future pensioner households is to be increasingly secured through occupational and private pension schemes. Especially in the case of private old-age provision and defined-contribution occupational pensions, early contributions are of great importance for future pension entitlements owing to the compound interest effect. Furthermore, occupational pension schemes are based on the existence of an employment contract, thus excluding the unemployed and self-employed. There is no universal entitlement to an occupational pension even within the working population. Instead, this is often targeted specifically at the core workforce. Therefore, employees in atypical employment relationships often do not have access to occupational pension schemes.

Voluntary pension provision is not an option

Access to employment has become more difficult for young adults and phases of atypical and insecure employment have increased significantly. This also determines the income situation of young adults. At the same time, additional private, mostly voluntary old-age provision is becoming increasingly important, especially for today's young adults. The contributions in the publication show that these demands overwhelm the young adults. Old-age security is definitely perceived as important, but savings can only be built up to a small extent and then often serve as protection against short-term life risks. This also includes periods of unemployment, which are often not covered by unemployment insurance due to atypical employment histories. At the same time, old-age security is definitely perceived as important. However, there are mostly short-term financial problems to solve.

Need for reform in labour market integration and pension provision

The authors see a considerable need for reform for young adults in access to social protection in the labour market and lay down specific demands for better coverage in pension insurance. For example, access to social protection must also be granted in atypical forms of employment, as also required by Principle 12 of the European Pillar of Social Rights. Nor should occupational pension provision be limited to the core workforce. Furthermore, a sufficient minimum contribution level should also be guaranteed for periods of unemployment.