OECD Reviews of Pension Systems: Slovenia

Report

OECD Reviews of Pension Systems

27 January 2022

1. Earnings‑related public pensions

Abstract

This chapter analyses public earnings-related pensions in Slovenia compared with other OECD countries. It first provides contextual information related to demographic developments and labour market performance. The chapter then discusses pension eligibility conditions and benefit calculation rules, as well as their implications for future replacement rates for employees, civil servants and the self-employed. It shows the implications of career interruptions due to childcare or unemployment on future pensions.

1.1. Introduction

This chapter reviews the parameters of the public earnings-related pension scheme and identifies the main weaknesses. However, it does not discuss issues directly related to financial sustainability, which is the focus of Chapter 2. This chapter starts by describing the demographic and labour market context in Section 1.2. Section 1.3 provides an overview of the pension system today and reform trends since its introduction in 1992. Pension eligibility conditions are then discussed in Section 1.4. The calculation of pensions is analysed in the next section (Section 1.5). Based on these, pension replacement rates are analysed, including full-career cases, the impact of incomplete careers due to unemployment and childcare on pensions (Section 1.6). An analysis of pension rules for the self-employed follows (Section 1.7).

1.2. Economic and demographic context of Slovenian pensions

1.2.1. Relative income of older people close to OECD average

As in many OECD countries, older people in Slovenia have on average a lower disposable income than the entire population (Figure 1.1). The average disposable income of the 66‑75 age group is equal to 89% of that of the full population, below the OECD average of 94%. This relative income ratio is below 80% in the Baltic states, the Czech Republic and Korea while it exceeds 100% in 12 OECD countries including Greece and Italy.

People aged 76+ have a lower average income than the 66‑75 in Slovenia as in all OECD countries except Poland. The mean disposable income of this age group equals 80% of that of the entire population in both Slovenia and the OECD on average. Across the OECD, this ratio varies from less than 60% in Estonia, Korea and Latvia to more than 90% in Austria, Chile, Costa Rica, France, Hungary, Israel, Italy, Luxembourg, Portugal and Turkey.

Figure 1.1. Relative income of older Slovenians is around the OECD average

The relative income of people older than 65 improved in Slovenia between 2004 and 2015 from 85% to 90%, but it declined slightly thereafter. The average income of older people increased faster in the OECD on average from 80% of that of the entire population in 2004 to 88% in 2018 (Figure 1.2).

With a Gini coefficient – a measure of inequality that equals 0 if every person receives the same income and 1 if one person receives all income – of 0.256 among the population aged 66 and over, old-age income inequality in Slovenia is substantially below the OECD average of 0.304. The Slovenian level is comparable to that of Germany, Hungary and Poland. Relative poverty among older people is just below the OECD average (Chapter 3).

Figure 1.2. Relative income of older Slovenians has been stable over time

1.2.2. Employment after age 50 has been increasing but still plummets around age 60

Employment after age 60 is very low in Slovenia. In 2019, 68.6% of people aged 55‑59 were employed in Slovenia, only slightly below the OECD average (Figure 1.3). The drop of employment at older ages is much sharper in Slovenia than in most OECD countries. In the 60‑64 age group, one‑quarter of Slovenians were in employment, half of the OECD average. The employment rate for this age group is lower only in Luxembourg. Similarly, among the 65‑69, the employment rate in Slovenia at 6.2% remains well below the OECD average of 23.0%, with several Central and Eastern European countries having a similar rate, including Hungary at 9.1%, Poland at 10.8% and the Slovak Republic at 9.5%, as well as Austria at 8.6%.

Figure 1.3. Employment rates plummet around age 60

However, employment of people in their fifties has significantly improved over the last two decades (Figure 1.4). Between 2000 and 2019, male employment increased by 9 percentage points to 87% in the age group 50‑54, just above the OECD average level. Over the same period and for the same age group, the female employment rate increased even stronger by 35 percentage points, to 86%, compared to the OECD average of 75%. In 2019, only the Czech Republic and Sweden had higher employment rates among women aged 50‑54.

While the Slovenian employment rates in the age group 55‑59 were among the lowest in the OECD in 2000, employment increased among both men and women over the last two decades. Much less than half of men (44%) in this age group were in employment in 2000, increasing to three‑quarters (75%) by 2019, reducing the substantial gap with the OECD average to less than 5 percentage points. The employment rate among women in this age group took off over this period, from 17% to 68% between 2000 and in 2019, surpassing the OECD average in 2018.

Employment rates in the age group 60‑64 have increased less strongly since 2000. Male employment in this age group increased by around 10 percentage points to 29% in 2019, and from 10% to 19% among women. Throughout this period, Slovenia consistently was among the countries with the lowest employment rates for both men and women in this age group.

Finally, in the age group 65‑69, employment fell over this period. In 2000, 16% of men and 10% of women in this age group were in employment, compared to 8% and 4%, respectively, two decades later. Over the same period, the average employment rate among people aged 65‑69 in the OECD increased. As a result, the difference between the employment rate in Slovenia and the OECD average increased from 6 percentage points in 2000 to 26 percentage points in 2019 for men, and from 1 to 18 percentage points for women over the same period.

Figure 1.4. Employment has increased strongly in 50s and plateaued in 60s since 2000

Correspondingly, Slovenia has systematically been among the OECD countries with the lowest average labour market exit age, especially for women (Figure 1.5). Steadily increasing from around 57 years in the late 1990s, the male average labour market exit age reached 61.5 years in 2020. Over the same period, it increased from around 54 to 60.5 years among women. Across OECD countries, men and women on average left the labour market at substantially older ages in 2020, 63.8 and 62.4 years, respectively. On top of Slovenia, eight other OECD countries have an average labour market exit age of 61.0 years or below, when averaging men and women.

Figure 1.5. Labour market exit ages increased but remain below the OECD average

1.2.3. Population ageing will be accelerating at a fast pace

Life expectancy in Slovenia is now close to the OECD average

Life expectancy at age 65 increased faster in Slovenia than in the OECD on average over the last decades (Figure 1.6). Women’s life expectancy at 65 caught up with the OECD average around 2010, reaching 21.4 years in 2020. Male life expectancy at age 65 has also increased faster in Slovenia since 2000, but remained half a year below the OECD average at 17.6 years in 2020. Based on UN projections, remaining life expectancy would grow in the future by about 0.9 years per decade for women, while it would grow faster for men by 2040 (1.3 years) before slowing to 1.0 year per decade.

Figure 1.6. Life expectancy in Slovenia has almost caught up with the OECD average

Working-age population will shrink in Slovenia

The working-age population (20‑64) is projected to decrease by 10% in the OECD on average between 2020 and 2060, i.e. by 0.26% per year. The projected fall in Slovenia will be much larger, by 27%, but substantially less than by around 40% in Latvia, Lithuania and Poland (Figure 1.7). This will lower future contribution revenues posing challenges to the financial sustainability of pay-as-you-go (PAYGO) pensions. By contrast, in Australia, Israel and Mexico, the working-age population is projected to grow by more than 20% by 2060.

Demographic old-age to working-age ratio has accelerated

By 2050, Slovenia is projected to have 65 people aged 65+ per 100 people aged 20‑64 against an OECD average of 53 (Figure 1.8). Slovenia’s demographic old-age to working-age ratio would be the seventh highest in the OECD, after Japan and Korea, and Southern European countries with a ratio of 71 for example in Portugal and 78 in Spain. Among other Central and Eastern European countries, it would range from 53 in Hungary to 60 in Poland.

Figure 1.8. Slovenia will have a high demographic old-age to working-age ratio in 2050

These 2050 old-age to working-age ratios are much higher than current levels of 35 for Slovenia and 31 for the OECD on average, which are themselves up from 17 and 20, respectively, in 1990. Figure 1.9 shows that this ratio is projected to peak at 68 around 2055 in Slovenia and highlights that the pace of ageing (as measured by the increase in this indicator) is expected to be significantly faster than in the OECD on average in the next three decades. By comparison, Eurostat projects a somewhat slower shift in the demographic structure than based on UN data, with the old-age to working-age ratio reaching 62 in 2055 in Slovenia. Different migration assumptions partially explain the differences between Eurostat’s and UN’s projections.1

Figure 1.9. Slovenian demographic old-age to working-age ratio expected to peak around 2055

1.3. Overview of the Slovenian public pension system

This section presents pension rules in Slovenia as of 2020 and the evolution of these rules since the introduction of the current pension system in 1992. An in-debt analysis of these rules in international perspective follows in the next sections.

1.3.1. Public pension system today

The pension system in Slovenia consists of the public pension scheme, occupational pensions and voluntary individual schemes. Occupational schemes are funded, defined contribution and voluntary except for civil servants and persons employed in hazardous and arduous occupations, for whom mandatory occupational pensions top up the universal scheme. Chapters 5 and 6 cover individual and occupational private pension arrangements.

Eligibility conditions to public pension

Eligibility to an old-age pension requires being 60 or older and having worked, and contributed, for at least 40 years. This period of paying contributions whilst working is called the “pensionable service without purchase” in the Slovenian pension law and it includes all work-related periods for which contributions have been paid, e.g. dependent employment, self-employment, agricultural activity, unemployment spells or parental leave, but it does not include the insurance periods based on either purchased periods or voluntary contributions. Alternatively, one can claim an old‑age pension at age 65 with at least 15 years of insurance period. “Insurance period” is a broader term and it includes all periods for which contributions have been paid. Based on having children, military service or having started the career before the age of 18, the age condition can be lowered to 56 and 58 for women and men with 40 years of pensionable service without purchase, respectively, while 38 years of pensionable service without purchase grant eligibility in those cases from age 61. It is also possible to purchase up to 5 years of insurance, but the purchased contributions are not used to relax age requirements. If the eligibility conditions are met thanks to purchased periods, retiring before age 65 is subject to a permanent reduction of 3.6% for each year before age 65, capped at 18% in total. Very few people use this option.2

Public pension entitlements

The Slovenian public pension scheme covers all workers and is mandatory, defined benefit and pay-as-you-go. Public pensions are administered by a governmental agency named Pension and Disability Insurance Institute (ZPIZ). The benefits are earnings-related and calculated by multiplying total accruals by the reference wage. In turn, the reference wage is the average of the best consecutive 24 years of “adjusted” earnings, with past earnings valorised by the average‑wage growth. Earnings are adjusted every year by multiplying gross earnings by the ratio of net average wages divided by gross average wages; this ratio was equal to 64.63% in 2019.3 Hence, “adjusted” earnings are conceptually close to net earnings; they are exactly equal to net earnings at the average wage.

Pension entitlements require at least 15 years of contributions. They will be equal to 29.5% of the reference wage plus 1.36% of the reference wage for any additional year beyond the first 15 years for both men and women from 2025 onwards, when accrual rates of men have converged to those of women. As a result, from 2025 onwards, after 40 years of contributions a person can expect gross pension to replace 63.5% (= total accruals) of the reference wage (63.5% = 29.5% + 1.36%*25). As of 2019, men accrue 27% of the reference wage for the first 15 years and 1.26% of the reference wage for each additional year of contributions. Once eligibility conditions to pensions of age 60 with 40 years of pensionable service without purchase are met, continuing to work generates an annual accrual rate of 3% for the first three years instead of the standard 1.36%. The benefits during retirement are indexed to 40% of price inflation and 60% of average‑wage growth.

On top, all pensioners receive an additional payment once a year, called the annual allowance. The benefit level is set discretionarily and has been higher for low pensions since 2013, ranging from EUR 437 in 2019 for monthly pensions lower than EUR 470 (hence boosting low pensions by at least 7.7%) to EUR 127 for pensions higher than EUR 810 (hence increasing high pensions by at most 1.3%). This compares with the average annual pension of EUR 8 052 in 2019 (or 671 per month).

Part-time workers acquire pension rights proportionally to their working hours (relative to full-time working hours of 40 hours per week). Working part time affects pension entitlement through lower accruals, but not through the reference wage. More precisely, total accruals take into account the working time while for reference wage calculation, the wage of a part-time worker is converted into a full-time equivalent. For example, if a person works 20 hours a week for a year, only half a year is taken into account for total accruals. This also means that for eligibility conditions the insurance period for part-time work is also prorated. Someone who worked half-time during 28 years validates 14 years of contributions and is therefore not eligible to pensions. Consequently, part-timers need to work for longer periods to meet eligibility conditions.

Minimum pension

In the case of low earnings during the whole career, the reference wage is set at a minimum of 76.5% of the net average wage, thereby effectively providing a floor to the earnings-related pension, i.e. minimum pension. This minimum pension is by definition unrelated to past earnings and increases with the pensionable service from 22.6% of net average wage after a full-time career of 15 years to 48.6% after 40 years. On top of this floor, the reference wage is also subject to a ceiling, set at four times the minimum reference wage, which then imposes a ceiling to pension levels. Hence, earnings higher than about three times (~ 4 * 76.5%) the average wage do not generate any pension entitlements while there is no ceiling to contributions. Additionally, a guaranteed pension was introduced in 2017 at EUR 500 (EUR 620 in 2021) for those who have met full conditions regarding pensionable service (Chapter 3).

Survivor pensions

Survivor pensions are paid to widows and widowers and to other dependent family members, including children and parents. From 2022, claiming pensions after the death of a spouse will be possible from the age of 58 and being at least 53 when the death occurred. The right to a survivor pension applies also after a divorce if the deceased person paid alimony. Survivor pensions equal to 70% of the deceased’s pension but it is eligible only if the survivor does not work and does not receive an own pension. The survivor having an own pension can choose to combine it with the survivor pension, which in that case is reduced to 15% of the deceased’s pension subject to a ceiling of 11.7% of the minimum reference base, or to forego the own pension and receive the full survivor pension of 70%.4

Public pension finances

Old-age and survivor pensions are financed along with disability pensions from contributions equal to 24.35% of gross wages for employees5 – 15.50% paid by employees and 8.85% by employers – or of earnings for the self-employed, direct transfers from the state budget and a small transfer from publicly owned assets, managed by a state‑owned enterprise, Kapitalska Druzba. In 2019, contributions covered 81% of all revenues while transfers from the state budget accounted for 18%, and transfers from Kapitalska Druzba covered the remaining 1% (Figure 1.10, Panel A). Any pension deficit is always financed by the state budget, in particular as there is no buffer fund.

ZPIZ expenditures equal 11.5% of GDP (2019 data), with old-age pensions, survivor pensions and the annual allowance representing 66%, 3% and 3% of total spending, respectively (Figure 1.10, Panel B). In addition, 8% of the social security budget finances health insurance of all pensioners. Indeed, while workers pay separate contributions to the National Health Insurance Institute at the rate of 12.92% (6.56% paid by employers and 6.36% by employees), pensioners do not pay any health contributions and the ZPIZ contributes for them at the low rate of 5.96%. Finally, 9% of ZPIZ expenditures relate to disability pensions, with about four‑fifths of recipients of disability pensions being 60 or older. Other benefits account for 12% of spending and include mainly long-term care benefits. The financing of non-contributory benefits, which top up low pensions or are granted to those with less than 15 years of contributions, was shifted from the ZPIZ to the state budget in 2012 (Chapter 3).

Figure 1.10. Revenues and expenditures of social security (ZPIZ) in Slovenia in 2019

1.3.2. Evolution of the Slovenian public pension system

The social security system in Slovenia originates in the 19^th-century Austro-Hungarian Empire. A Bismarck-type social insurance system covered risks related to health, work accidents and old age, first for miners and then expanded to civil servants at the beginning of the 20^th century. A population-wide old-age insurance was introduced after World War I in Yugoslavia, replaced by a new one in 1948 when all accumulated assets were nationalised and the system became fully pay-as-you-go (Kresal, 2013[3]; Stanovnik, 2002[4]). After Slovenia gained independence in 1991, the first national pension system was introduced in 1992. It inherited many elements of the Yugoslavian system along with the employment and earnings records dating back to the 1960s. Parametric reforms took place since 1992 within the PAYGO defined benefit framework. However, in contrast to many Central and Eastern European Countries (CEECs), Slovenia did not go through a systemic reform.6 Table 1.1 summarises the main measures, which were taken as part of the 1999, 2012 and 2019 reforms.

Policy area		Reforms
Eligibility conditions		Elimination of the option to retire early with 20 years of insurance (2012). Increase of the retirement age for men from 58 to 60 years with 40 years of insurance (2012). Increase of the eligibility conditions for women from age 53 with 35 years of insurance to age 60 with 40 years of insurance (1999, 2012). Increase of the retirement age of women from 60 to 65 with 15 years of contribution (1999, 2012). Introduction of a lower retirement age based on childcare (1999, 2012). Increase of the eligibility to survivor pensions from age 53 to 58 (2012).
Pension calculation	- reference wage	Extension of the period used to calculate the reference wage from 10 to 18 years (1999) and to 24 years (2012).
	- accrual rate	Decrease of the total accrual rate from 85% to 72.5% (1999). Extension of the period to accrue full pension from 35 to 38 years for women (1999). Change in pension calculation: decrease in accrual rate to 64.25% for women and 57.25% for men after a 40‑year career offset by eliminating the adjustment to the valorisation of past wages (2012). Extension of the period to accrue full pension from 38 to 40 years for women (2012). Elimination of further drops in women’s total accrual rate and stabilisation at 63.5% for women, and increase in men’s total accrual rate to 63.5% (2019).
	- indexation rule	Setting the indexation rule to 60% of wages and 40% of prices (2012).
Combining work and pensions		Introduction of an option to claim 20% (2012) and 40% (2019) of a pension when working full time. Increase of the accrual rate for the first three years of combining work and pensions to 4% (2012) and to 3% (2019).

Source: OECD based on MLFSAEQ.

Tighter eligibility conditions combined with lower retirement ages for having children

Since 1992, pension eligibility conditions have depended on both age and the length of insurance record. People were initially allowed to retire at 65 for men and 60 for women based on 15 years of insurance; for women, this age condition increased gradually to 65 between 2000 and 2016. Moreover, having 20 years of insurance used to provide access to pensions at younger ages.7 The 2012 law gradually eliminated this possibility, which was closed in 2020.

However, in the old system, the most frequent retirement option required 35 and 40 years of insurance period at age 50 and 55 for women and men, respectively. The 1992 law gradually increased the age conditions to 53 and 58 years, respectively, by 1998. The 1999 law gradually raised the insurance period condition to 38 years for women. Finally, the 2012 law gradually increased these eligibility conditions to 40 years of pensionable service without purchase at age 60 for all by 2019.8 The option to purchase up to 5 years of insurance period was maintained but retiring thanks to the purchased period has become subject to benefit reduction. Additionally, the age requirement to survivor pensions was increased from 53 to 58 years by 2022.

People who reached eligibility conditions before 2012 have retired following the previous rules. Figure 1.11 shows that until 2014, the majority of new pensions were granted following the previous law and that the transition was almost over by 2018 when 96% of new pensions followed the 2012 law.

The tightening of the eligibility conditions since 1999 was partially offset by providing exemptions for having children, to one of the parents. Which parent should benefit from the exemption was to be agreed between them. In 2000, the retirement age was lowered depending on the number of children. For each child, the reduction was initially of 0.50, 0.75, 1.00 and 1.25 months for the first, second, third and each subsequent child, respectively, and set to increase gradually to 8, 12, 16 and 20 months by 2015. However, the 2012 law limited these reductions to 6, 10, 10 and 10 months, respectively, and 12 months for the fifth child and 0 for any subsequent ones. In addition, a floor was introduced for the retirement age, at 56 and 58 years for women and men, respectively, while, upon meeting other eligibility conditions, the mother has become the default parent unless the father has received parental benefits.

Figure 1.11. From 2015 the majority of pensions are granted based on the 2012 rules

Changes in pension calculation over the last two decades

Under the 1992 law, the reference wage was calculated based on wages from the 10 best consecutive years. This period was gradually extended to 18 years by the 1999 reform and to 24 years by the 2012 reform, to be fully effective by 2017. The impact of a longer reference period on pension levels and pension distribution is discussed in a subsequent section.

The 1992 law granted total accruals of 85% of the reference wage after 35 years of insurance for women and 40 years for men, i.e. 2.4% and 2.1% annual accrual rates, respectively. The total accrual could not exceed 85%, no matter how long the insurance period was. The uprating of past wages with average‑wage growth was further adjusted by some complicated formula (Guardiancich, 2012[5]), resulting in the reduction of the reference wage by 16% in 2000 and 27% in 2012, compared to its value without this further adjustment (Majcen and Verbic, 2009[6]; Čok, Sambt and Majcen, 2010[7]), affecting all reference wages similarly, irrespective of the exact earnings trajectory.

The 1999 reform lowered total accruals to 72.5% after 38 and 40 years of insurance for women and men, respectively, i.e. to 1.9% and 1.8% annually, while eliminating the ceiling of 85%. There was a gradual phase‑in for new pensions as the changes only affected entitlements accruing after 1999. The full effect would have thus been fully visible after 2020 when new pensioners would have worked most of their career under the 1999 law.

The 2012 reform lowered total accruals further to 64.25% and 57.25% after 40 years of contributions for women and men, respectively, i.e. to 1.6% and 1.4% annually. In addition, total accruals would gradually decrease to 60.25% for women by 2023. However, these reductions were largely offset by uprating past wages fully to average‑wage growth through the elimination of the unfavourable adjustment discussed above. Moreover, this elimination improved transparency.

The 2012 reform was legislated as the Global Financial Crisis was exerting large public finance pressure. In contrast to previous reforms, it was introduced with a very short transition period while sharply limiting the grandfathering of past entitlements. Indeed, for those who had not reached the eligibility conditions by 2012, the new accrual rates were applied to the whole earnings histories. This change was particularly important for insurance periods prior to 2000, when the accrual rates were substantially higher.

However, the 2019 reform backtracked and eliminated any further decrease, freezing women’s total accruals at 63.50% after 40 years of insurance. In addition, the reform introduced a pension bonus for having children, at 1.36% accrual per child up to three children. This bonus does not apply if the retirement age condition is lowered based on childcare. The 2019 reform also increased men’s total accruals from 57.25% to 58.50% in 2020 and then gradually to the new women’s level of 63.50% by 2025.

Figure 1.12 shows the joint effects of changes in accrual rates, in the uprating of past wages and in the gross-net wage coefficient on gross replacement rates. Both men and women who earned the average wage and retired in 2000 had a gross replacement rate of 45% after a full career of 40 and 35 years, respectively. Total accruals then diverged between men and women, while the adjustment to the uprating of past wages lowered the replacement rates further by 6% by 2003 and by 13% in 2012. Overall, for individuals retiring in 2012, the theoretical replacement rates decreased to 37.6% for men and 40.4% for women.

Figure 1.12. Theoretical gross replacement rates for people retiring in 2000‑25

In 2013, the improved uprating of past wages almost fully offset the decrease in accrual rates for men. By contrast, the replacement rate for women rose to 42% as it is associated with an increase in the period to accrue the full pension from 38 to 40 years. Men’s replacement rates started to converge to women’s levels in 2019 as a result of the reform, reaching 41% in 2025.

The average newly granted pension recently declined for men, from 45% of the national average wage in 2013 to 41% in 2019 (Figure 1.13, Panel A), while extending the full-career condition for women from 38 to 40 years in 2012 has helped maintaining their new pensions at around 44% of the average wage. More generally, the decrease in the average effective insurance period for men and its increase for women (see below) have been central in the evolution of pension differences across genders.

Between 1992 and 2012, benefits were indexed in relation to wage growth but with some complex albeit significant additional adjustment. This implied that the actual indexation was about 0.6 percentage points lower than wage growth per year on average (Majcen and Verbic, 2009[6]). The 2012 reform set pension indexation as a mix of 60% of wages and 40% of prices, which greatly improved transparency. Still, between 2012 and 2015 the benefits were not indexed at all as the fiscal situation was tight, but this was offset from 2020 by extraordinary pension indexations in 2019 and 2020.

Overall between 2000 and 2019, pensions thus did not keep pace with wages. The gross average wage increased by 39% in real terms against only 5% for gross average pension, with even a decline in real terms between 2009 and 2014. This led to a big fall in the average pension relative to the average wage from 51% to 39%, i.e. a drop of almost one‑quarter (Figure 1.13, Panel B).

Figure 1.13. Pensions have been steadily declining compared to wages since 2000

The distribution of pensions remained broadly stable in real terms for the upper half of pensions between 2007 and 2019 (Figure 1.14). However, the first deciles increased sharply partly due to the introduction of the guaranteed pension in 2017 (Chapter 3).

Figure 1.14. The lower end of pension distribution has changed since 2007

Flexibility of retirement and combining work with pension have been eased

When working after fulfilling eligibility conditions to an old age pension, there is no earnings cap nor earnings limit beyond which pension benefits are reduced. However, only part of the pension can be claimed when combined with work. The 2020 reform provided some improvement in the flexibility to combine work and pensions. Yet, when working full time, only 40% of the old-age pension can be claimed for the first three years and 20% thereafter. This implies a mandatory deferral of 60% and then 80% of the benefit when working. The same rules apply to people who re‑join employment after having retired.

Between 2016 and 2020, the share of pension that could be combined with full-time work was only 20%, also applicable to those re‑joining full-time employment. Between 2012 and 2016, the conditions were tighter and the 20% of pension was paid only until age 65 and only to those who have not reduced working hours after qualifying to pensions. The option was not available upon re‑joining employment after having retired. Before 2012, it was possible to combine work and part of pensions only when working less than half time.

As of 2020, when working after meeting full eligibility conditions the annual accrual rate is increased from 1.36% to 3.00% for three years. Between 2013 and 2019 the additional accrual was 4.00%, but, as explained above, only 20% of pension could be claimed. Between 2000 and 2012, the accrual rates were set at 3.0%, 2.6%, 2.2% and 1.8% for the first through the fourth year of work beyond the eligibility conditions. Before 1999, the accrual rate beyond eligibility condition was in fact lower than the regular one, at 1% annually.

The share of new pensioners who combine work and pensions sharply increased from 7% to 36% between 2013 and 2018 and is likely to rise further as the part of the pension available to full-time workers increased from 20% to 40% in 2020 (Figure 1.15).9 Figure 1.15 shows that the number of newly granted benefits increased steadily from 18 241 to 23 791 between 2013 and 2018 while the number of non-working new pensioners declined from 17 071 to 15 906. This suggests that extended options of flexible retirement may have contributed to prolonging working lives.

Figure 1.15. Number of people combining work and pensions increased substantially since 2013

Combining work and pensions in Slovenia is roughly actuarially neutral, as the inflated accrual rate of 3% actuarially compensates for the mandatory deferral of 60% of pensions when working. Such mandatory deferrals are complex and rather uncommon in OECD countries and combining work and pensions after the official retirement age is possible in all OECD countries – at least when pension eligibility conditions are met – although disincentives exist in several of them. By contrast to most defined benefit schemes in OECD countries, Slovenia does not provide any bonus for deferring pensions when not working. A more detailed analysis of combining work and pensions in Slovenia compared to the OECD countries is provided in Annex 1.A.

1.4. Pension eligibility conditions remain loose compared with other countries

1.4.1. The normal retirement age will continue to lag well behind the OECD average

The OECD normal retirement age is defined as the age when you can start receiving a full pension without penalties after an uninterrupted career from age 22. The normal retirement age typically combines both the age and insurance period criteria. In 2018, the normal retirement age across OECD countries was equal to 64.2 years for men and 63.5 years for women on average among OECD countries (Figure 1.16). Only Greece, Luxembourg, Slovenia and Turkey had a normal retirement age below 63 years. Iceland, Norway, Italy and, for men only, Israel had the highest normal age of 67.

Figure 1.16. Normal retirement age is low and not foreseen to increase in Slovenia

In 2018, women had different normal retirement ages than men in one‑third of OECD countries. The largest gender difference was 5 years in Austria, Israel, and Poland. However, for the generation entering the labour market now, gender gaps are being phased out in all OECD countries except Hungary, Israel, Poland and Switzerland, and in Turkey for those starting the career in 2028. In Slovenia, the tightening of eligibility conditions since 1999 has not affected the normal retirement age for men entering the labour market at age 22, which has remained at 62 years, but has raised it for women from 57 to 62 years as the full contribution period increased from 35 to 40 years. The gender gap was eliminated in Slovenia in 2019.

The normal retirement age will increase in 20 OECD countries (Figure 1.16). For the generation entering the labour market in 2018, the average normal retirement age will raise to 66.1 years for men and 65.7 years for women based on current legislation, hence an increase of about 2 years. The future normal retirement age is below 65 years only in Luxembourg and Slovenia – the only countries where the retirement age is currently low and not projected to increase – as well as the Slovak Republic and Turkey.

Even with rising retirement ages, the time spent in retirement as a share of adult life is expected to increase in the vast majority of OECD countries (OECD, 2019[8]). Between the generations ending and starting their career in 2018, the remaining life expectancy at age 65 is projected to increase on average from 18.1 to 22.5 years for men and from 21.3 to 25.2 for women. This means that based on current legislations less than half of life expectancy gains would be passed on to increases in the normal retirement age. The share of adult life spent in retirement is 35% today and 39% in the future in Slovenia, among the highest levels in the OECD, which represent an increase of more than 10% in that share.10

1.4.2. Short contribution period to retire at age 60 without penalty

Along with Slovenia, Belgium, France, Germany, Greece, Hungary, Italy, Luxembourg, Portugal and Spain provide options to retire without penalty before the statutory retirement age for those having contributed long enough in public earnings-related schemes (Table 1.2). In Germany and Portugal this option is only for those with very long careers of 45 and 48 years, respectively. Belgium and France require 42 and 41.5 years, respectively. In Greece, Luxembourg, Slovenia and Spain a worker can retire after a shorter contribution period of 40 years (or even 37 years in Spain), but in Greece this is possible only from age 62, and in Spain from age 65. Italy introduced Quota 100, a temporary scheme that allows retiring at age 62 with 38 years of contributions; it applied since 2019 and was supposed to expire in 2021 but it was prolonged for 2022 with a higher age condition of 64. Thus, Luxembourg and Slovenia stand out as countries where one can retire without a penalty at age 57 or 60 after a 40‑year career. Hungary allows only women to retire after having contributed for 40 years without any age requirement.

Country	In 2020			Around 2060
Country	Contribution period	Minimum retirement age	Statutory retirement age	Contribution period	Minimum retirement age	Statutory retirement age
Belgium	42	63	65	42	63	67
France	41.5	62	66.6	43	62	67
Germany	45	63.5	65.5	45	65	67
Greece	40	62	67	40	66	71
Hungary	(40)		64.5	(40)		65
Italy	38	62	67	47.5 (46.5)		71
Luxembourg	40	57	65	40	57	65
Portugal	48	60	66.5	48	62.6	70
Slovenia	40	60	65	40	60	65
Spain	37	65	65.8	38.5	65	67

Note: Numbers for women in brackets if different than for men. For Italy, the option to retire at age 62 with 38 years of contributions has been introduced temporarily and will not apply in the future.

Source: OECD (2019[2]), Pensions at a Glance 2019: OECD and G20 Indicators, https://dx.doi.org/10.1787/b6d3dcfc-en, and SSA (2020[9]), Social Security Programs Throughout the World, https://www.ssa.gov/policy/docs/progdesc/ssptw/.

Based on current legislation, these eligibility conditions will be tightened in most countries, but not in Slovenia. In France and Spain, the reference contribution period will be lengthened by 1.5 and 2 years, respectively. In Germany, Italy (except for Quota‑100) and Portugal, which already apply a long reference period to retire early without penalty, the retirement-age condition will be tightened. The combined conditions will remain loose in Luxembourg and Slovenia, and for women in Hungary.

1.4.3. Low minimum retirement age

The large majority of countries had an early retirement age – the earliest age at which the receipt of a pension (potentially with penalties) is possible – for private‑sector workers lower than the normal retirement age.11 The early retirement age was 61.2 years in 2018 on average among the 31 OECD countries that have a specific minimum retirement age for their mandatory earnings-related scheme (Figure 1.17). Tightening eligibility conditions for early retirement either by increasing the minimum retirement ages or by making early retirement more penalising has been one major pension policy trend over the last decades. Early retirement ages have been rising by a little over one year between 2004 and 2018.

In Slovenia, it is possible to retire at age 60 after a 35‑year long career, provided that the insurance years missing to reach 40 years are purchased; in that case, benefits are subject to the penalties described in the Overview section above. When starting the career at age 22, a worker without career interruptions needs to purchase two years of insurance to be able to retire at age 60. Slovenia is among few OECD countries where private‑sector workers can access their pensions at age 60 or below (Figure 1.17).12

Figure 1.17. Early retirement age is low in Slovenia

1.4.4. Sharp increase from a low level in the effective age of claiming pensions

The average age of claiming pensions for the first time sharply increased by five years, from 57.5 to 62.5 for men between 1992 and 2019 (Figure 1.18). For women, the rise was even larger from a very low age of 52.7 years to 60.7 years. Hence, the gender gap more than halved during that period although women still retire about two years before men on average. This relates to the tightening of eligibility conditions for women through the whole period, while they did not change for men between 1999 and 2012. Since 2013, the effective age of claiming pension has increased significantly due to improvements in labour market conditions after the global financial crisis and following the 2012 pension reform, which tightened eligibility conditions and eased the possibility to combine work with pensions.

Despite these upward trends, many people still retire very early. As explained in Section 1.2.1, retirement-age conditions can be lowered based on having children, military service or having started the career before the age of 18. Half of women and one fourth of men started claiming their pension before age 60 in 2019 (Figure 1.19). Incentives to work longer when eligible to pensions before age 60 are poor. The age‑related penalties for early retirement, i.e. based on the purchased period, are capped at age 60. Moreover, the accrual rate increases from 1.36% to 3% for working beyond 40 years only after age 60: before age 60 there is no bonus on deferring pensions and the 1.36% accrual rate provides little incentive (Annex 1.A). Retiring after age 65 – which requires a much shorter insurance period of 15 years – is uncommon among women: only 1 in 20 do so against almost 1 in 3 among men.

Figure 1.18. Average effective age of claiming pensions has sharply increased although it has stagnated for men since 2004

Figure 1.19. Half of women and one‑quarter of men still retire below age of 60

1.4.5. Lower average insurance period of new male retirees since 2006

The upward trend in the average insurance period of new retirees stopped around 2007 (Figure 1.20). With the global financial crisis, and perhaps due to the uncertainty around pension reforms, people then tended to retire with slightly shorter contribution periods. As a result, the average insurance period among new retirees declined from 38.3 to 37.3 years for men between 2006 and 2012, and from 36.0 to 34.9 years for women between 2008 and 2011.

After 2013, it fell further for men to 37 years in 2019, probably due to the increasing impact of less favourable employment records since the transformation in the early 1990s. For women, the upward trend resumed in 2012 and the average insurance period increased strongly to 39 years in 2019. By crediting periods of part-time work to one of the parents of children younger than four in the same way as full-time work, the 2012 reform has been a key determinant of this increase along with the impact of retiring later as shown in Figure 1.18. In 2019, among new retirees, about one‑quarter of men and half of women retired at age 59 or earlier with an average qualifying period of around 40.5 years.

The increasing incidence of combining work and pensions might partially explain the recent decrease in the average insurance period among new male pensioners. The share of new pensioners combing work and pensions increased from 6% to 36% between 2013 and 2018. More than three‑fifths of those combining work and pension work full time, which is called dual status, of whom 60% are men. When working full-time, only 40% of the pension is paid (20% before between 2013 and 2019), but the beneficiaries are not taken into account in the calculation of the published average insurance period of new pensioners; they are taken into account once pensioners claim the full benefit after having stopped working full-time. This might temporarily lower the average insurance period of new pensioners because the average insurance period of people in dual status was 39.8 years for both men and women in 2019, which is substantially more than among all new pensioners, at 37 and 39 years for men and women, respectively.

Figure 1.20. Insurance period has declined for men since 2006

1.4.6. At the same ages, younger cohorts accumulated shorter insurance periods

Younger cohorts generally have shorter insurance periods at the same age (Figure 1.21). In 2009, men and women aged 50‑54 had an average cumulative insurance period of 29.3 and 31.1 years, respectively, which decreased to 27.4 and 30 years in 2019 (Panel A). A similar pattern is visible also at younger ages (Panel B). Shorter insurance periods at given ages stem from younger cohorts having spent more time in education.13 Additionally, younger cohorts have been more exposed to unemployment risks after 1992. Younger cohorts will have to retire later to offset the impact on pension replacement rates.

Figure 1.21. At the same ages, younger cohorts accumulated shorter insurance periods

1.4.7. Favourable unemployment protection for older workers might help early retirement

Many people are unemployed immediately before claiming pensions in Slovenia. Almost one in five new retirees were insured based on their unemployment status one month before claiming pensions in 2019 Figure 1.22.14 The more favourable unemployment protection of older workers contributes to this pattern. First, unemployment benefits are paid for 19 months when older than 53 years with at least 25 years of insurance, increasing to 25 months when older than 58 with 28 years of insurance. This compares with 12 months maximum for younger individuals. Second, when less than one year is missing to reach the pension eligibility conditions, pension contributions are subsidised by the state budget to bridge the gap and pension entitlements accrue accordingly. This contributes to explaining why in 2019 among the 55+ there were only 100 unemployed classified according to the ILO definition (i.e. actively searching for a job) out of 301 total registered unemployed against only 134 of registered unemployed aged 25‑49.15

Moreover, Slovenia provides additional employment protection for older workers. A worker cannot be dismissed for economic reasons from age 58 until qualifying for an old-age pension, or during the five years just before fulfilling the qualifying period. This additional protection ceases when workers become eligible to old-age pensions or to unemployment benefits, and in that latter case until meeting the conditions for an old-age pension.16 In December 2020, the requirement to provide a justified reason when dismissing an employee who has met eligibility conditions to the old-age pension was removed, which effectively introduces a mandatory retirement age. However, the implementation of this amendment is uncertain as it has been appealed in the Constitutional Court on the ground of discrimination.17

Annex 1.B provides a summary of mandatory retirement and pensions in OECD countries, with implications for Slovenia. The analytical part leads to three main findings:

More than half of OECD countries do not allow for mandatory retirement in the private sector. Nine OECD countries ban mandatory retirement even for civil servants.
Mandatory retirement practices have been reduced in a number of countries. With the exception of Slovenia since December 2020, no European country allows mandatory retirement before the statutory retirement age, except for specific occupations with health and safety concerns. Only a few European countries have some form of mandatory retirement in the private sector before the age of 68 years.
Mandatory retirement is sometimes advocated if seniority is an important component in wage setting or in the case of strict employment protection against individual dismissals. Slovenia scores below the OECD average in terms of both importance of seniority pay and strictness of employment protection.

Figure 1.22. Many people retire from unemployment or no‑insurance status

1.5. Main rules to calculate pension benefits

In Slovenia, pension benefits are calculated from a defined benefit formula in which: the average annual accrual rate depends on the insurance period; the reference wage is based on net wages from the best consecutive 24 years; and there is a strong redistribution through the high level of the minimum reference wage.

1.5.1. The reference wage is based on only 24 years of earnings

Pension benefits in Slovenia are calculated by multiplying total accrual rates by the reference wage (also called the pension rating base). To calculate the reference wage, past wages are valorised with the average wage growth. Then the most favourable 24 consecutive years are averaged to calculate the reference wage. Only years in which contributions were paid for at least six months are included in the calculations. If, in a given calendar year, contributions were paid for a shorter period, the year is not taken into account and is replaced with the next available year (or years). This applies only to the reference wage calculation while the total accrual rate accounts for all months of insurance.18 As mentioned before, a floor at 76.5% of the net average wage applies to the reference wage, and a ceiling of 306% of the net average wage.

The large majority of OECD countries take into account wages throughout the whole career for calculating pension benefit. Recently, the Czech Republic, Greece and Norway joined this group (Boulhol, 2019[10]). Exceptions are Austria (which will use lifetime earnings for people born from 1955), France, Portugal, Slovenia, Spain and the United States (Figure 1.23). France, Slovenia and Spain are the only countries using 25 years or less, although France was planning to use lifetime earnings, but the reform was suspended due to the COVID‑19 crisis.

Figure 1.23. Few countries take into account only part of the career for pension calculation

Using part of the career generates inequities as people with the same lifetime earnings and the same total contributions might have very different pensions. While taking into account only the best years protects against some forms of career incidents, it also generates perverse, regressive effects by favouring workers experiencing large wage improvements who tend to be high-wage earners, as the low-wage periods (typically at the beginning of the career) are ignored (Aubert and Duc, 2011[11]). In addition, men and women with longer career breaks, due to e.g. childcare, rarely enjoy strong career progression (OECD, 2017[12]) and therefore they do not benefit from the shorter period to calculate the reference wage.

Figure 1.24, Panel A shows three career cases: one with stable earnings at the average wage throughout the career, one with a strong earnings progression: from 49% to 177% of average wage between ages 22 and 62, and one with average earnings when working but with the career affected by multiple unemployment periods covered by unemployment benefits. The wage parameters of the wage‑progression case are calibrated such that the average wage over the whole career is equal to that of the stable‑earnings case.

Under the current reference‑wage calculation (baseline), the strong career progression leads to a 25% higher pension than the stable‑earnings case although the lifetime earnings are the same (Figure 1.24, Panel B). Moreover, this reference wage calculation protects well against career breaks as the career-break case generates a pension that is only 2.0% lower compared to the uninterrupted career case.

The potential aggregate impact on pension expenditure of changing the reference period was analysed for Slovenia in 2010 (Čok, Sambt and Majcen, 2010[7]). The analysis based on individual earnings histories of people who retired in 2007‑09 showed that increasing the reference period from 24 to 32 or 40 years while keeping other parameters constant would decrease average pensions by 5.4% or 11.2%, respectively.19 However, to better identify the mechanism at work with short reference periods, it is best to consider changing the length of the reference period in a budget-neutral way, meaning in such a way that total pension expenditure and the average pension are unaffected. Lowering pension spending might be needed, but this is a different objective that can be pursued by a range of instruments. One simple way to lengthen the reference period in a budget-neutral way consists of raising accrual rates. The following analysis is based on such reform scenarios.

Figure 1.24. Short reference wage calculation favours careers with strong wage dynamics

Were the calculation of the reference wage prolonged to 32 years in a budget neutral way (scenario 1), the pension would increase by 5.7% in the stable‑earnings case due to higher accrual rates (Figure 1.24, Panel B). The pension of the strong-career progression case would decrease by 5.0% while remaining substantially higher than that of the stable‑career worker. In the case of multiple unemployment spells, the pension loss compared with the full-career case increases only very slightly to 2.7%.

Finally, were the calculation of the reference wage expanded to 40 years (scenario 2), i.e. to the full career of someone starting career at 22 and retiring at age 62, the pensions of the workers with uninterrupted careers but differing in the earnings profiles would equalise, being 12.6% higher than in the average earner pension under the current conditions (baseline). At the same time, the pension of the person with multiple unemployment spells is now 2.5% lower than the full-career case. This confirms that the current reference wage calculation strongly favours workers with strong career progression, who are likely to also have higher income, while extending the reference period does not penalise those with unemployment breaks.

Consistent with this, Čok, Sambt and Majcen (2010[7]) show that increasing the reference period would reduce pension inequalities. Indeed, such a reform while keeping the other parameters unchanged would not affect pensioners in the lowest quintile of pensions thanks to the effect of the minimum reference wage. The impact of increasing the period from 24 to 34 years would lower pension by about 6% for all higher quantiles. Hence, if such a reform is conducted in a budget neutral way, it could reduce old-age inequality without affecting average pension levels.

1.5.2. Gross pensions unusually accrue based on net wages

All OECD countries, except for Hungary and Slovenia, accrue pension entitlements based on gross wages. In Slovenia, the reference wage is expressed in approximately net terms because gross wages that enter in the calculation of the reference wage are multiplied by a coefficient, which is calculated from the tax and social security rate at average earnings and thereby fluctuates slightly every year. This coefficient (64.63% in 2019) means that at the average wage the reference wage is exactly equal to the net wage. Such a design makes gross pensions dependent on tax and social security rates.

Most pensioners do not pay income taxes. Pensions are taxed based on the progressive tax rates, which increase from 16% for low income (below 40% of annual average wage in 2019) to 50% (for income exceeding 350% of annual average wage). However, some tax allowances lower the taxable income. The general tax allowance amounts to EUR 3 500, i.e. 17% of annual average wage, and is granted to all taxpayers. This allowance is increased for people earning less than 63% of annual average wage, which results in no personal taxes being paid for income lower than 44% of annual average wage. On top, pensioners are granted an extra tax allowance of 13.5% of their pension, which additionally reduces the tax base. All this means that a single person receiving only pension would start paying the personal income tax when benefits exceed 120% of average pension or 46% of average wage. As a result, the average net pension was only 1% lower than the average gross pension in 2019.

This combination of pension accruals based on net wages and generous tax allowances for pensioners makes net pensions unduly complex. Any increase of personal income tax rates mechanically reduces gross replacement rates. It lowers net wages, and therefore gross pensions. Additionally, higher tax rates will reduce high net pensions further, having a double effect on pensions. On top, any increase of employees’ social security contribution rate will automatically reduce gross pension benefits. Both these effects might lead to unintended consequences of benefit deterioration following changes in tax or contribution rates. They also make the benefit calculation harder to understand for workers.

1.5.3. Strong redistribution through the minimum reference wage

The minimum reference wage is set at 76.5% of the net average wage, providing a floor that benefits low earners. In 2021, the minimum reference wage was EUR 913 per month, compared with a reference wage based on the minimum wage of EUR 662. The minimum reference wage multiplied by total accruals leads to minimum pension benefits, which thus depend on the length of the insurance period. The redistributive effect of the minimum reference wage is slightly offset by the minimum base for contributions, which is set at 60% of the gross average wage, implying that the effective contribution rate is higher for workers close to the minimum wage, which was equal to 55% of the average wage in 2020. In addition, the maximum reference wage is set at EUR 3 651 per month, or 306% of net average wage; contributions continue to be paid on wages above that ceiling, but they do not bring additional pension entitlements.

The minimum reference wage plays an important and increasing role in Slovenia. The share of new pensions calculated with the minimum reference wage stood at 38% for women and 30% for men in 2019 compared to 32% and 17% in 2013, respectively. In 2021, the minimum pension after a 40‑year career stood at EUR 580 (= 913*63.5%) for women and EUR 543 (= 913*59.5%) for men, which is topped up to EUR 620 through the guaranteed pension (Chapter 3).

Pensions are concentrated around levels corresponding to the minimum pension amount after a full career, and even more so for women than for men (Figure 1.25). The median pension was between EUR 600 and 700 in 2019. One in five men and one in four women received pension amounts between EUR 500 and 600. Only 5% of pensioners had pensions higher than EUR 1 500 and less than 1% had more than EUR 2000, which means that the maximum reference wage is effectively binding for only few workers: a 40‑year career with net earnings equal to the maximum reference wage would result in a pension equal to EUR 2 213 (= 3 485 * 63.5%).

Figure 1.25. Pension amounts are concentrated around EUR 600

For those having pensions lower than EUR 300 the average contribution period is about 20 years while among those with a pension between EUR 500 and 600 the average contribution period is 37.4 years (Figure 1.26). For those with higher pensions the average contribution period is only slightly higher as for the recipients of pensions of between EUR 1 500 and 1 600 the average contribution period is 38.5 years. Thus, whatever the pension bracket, many retirees have a total insurance period of less than 40 years for a few reasons. First, women were entitled to the full pension with careers shorter than 40 years until 2017 whereas the option of early retirement after a 20‑year career was closed for men in 2016 only and for women in 2020. Second, 38 years of pensionable service without purchase grant eligibility to the old-age pension from age 61 in case of having children, military service or having started the career before the age of 18. Third, those who have started working late or had long career breaks can retire with a much shorter insurance period of 15 years from age 65.

Figure 1.26. Prolonging insurance periods is crucial to increase low pensions

1.5.4. Effective accrual rate close to the OECD average

The effective accrual rate measures the rate at which benefit entitlements are effectively built for each year of contribution. For defined benefit (DB) schemes, it equals the nominal accrual rate adjusted to account for how pensionable earnings are defined (thresholds, valorisation of past earnings, sustainability factors). In defined contribution schemes (funded or notional) schemes the effective accrual rate depends on contribution rates, rates of returns and annuity factors.

Given the nominal accrual rates described above, the average annual nominal accrual rate for a 40‑year career stands at 1.026% in Slovenia for women and 0.945% for men retiring now converging to 1.026% for both men and women entering the labour market now.20 When the annual allowance is included it gives an effective accrual rate of 1.045%, which is very close to the OECD average of 1.046% (Figure 1.27). Based on current legislation, the highest future effective annual accrual rates are in Austria (1.78%)21 while Italy, Luxembourg, Portugal, Spain and Turkey also have an average accrual rate that is larger than 1.6%.

Figure 1.27. Effective accrual rate is close to the OECD average

1.5.5. Indexation of pensions in payment

Most OECD countries index pensions in payment to prices. Eight countries index benefits with a mix of price inflation and wage growth, four countries combine inflation and either GDP or wage bill growth. Norway and Sweden index pensions based on wage growth minus a fixed rate of 0.75% and 1.6%, respectively.22

Slovenia belongs to countries that index pensions to a mix of wages and prices, with weights of 60% and 40%, respectively.23 This indexation rule was introduced in 2012 while before indexation was linked to the changes in the average wage and in the average pension in a complicated way. Figure 1.28 shows that the actual indexation was close to the 60%‑40% mix between 2003 and 2008 on average. Frozen indexation in 2012‑15 resulted in the actual pension indexation being around 3 percentage points lower than implied by the 60%‑40% rule in this period, but this was offset by the extraordinary indexation in 2019 and 2020. On average over 2003‑20, nominal wages increased by 3.9% per year and consumer prices by 2.1% while the average annual pension indexation was 2.8%.

The real value of pensions should be protected to maintain standards of living, especially as retirees have very limited options to accommodate to lower income. This implies that pensions should be indexed at least to inflation. The indexation rule is the result of a political choice. For a level of total pension spending consistent with financial sustainability, there is a trade‑off between lower pensions when retiring and more generous indexation, with the higher level of indexation benefiting the pensioners in the first part of their retirement period and the groups having lower life expectancies.

Figure 1.28. Pension indexation lagged behind the rule after the global financial crisis

1.6. Future pension replacement rates of dependent employees

This section provides an assessment, based on the OECD pension model, of future replacement rates in international comparison, for dependent employees by earnings levels and for various career patterns, including the impact of career breaks due to unemployment and childcare.

1.6.1. Slightly higher net replacement rates than OECD average at the average wage…

As a best case – full career from age 22 until the normal retirement age – illustrating what pension systems produce in a comparable way, the future net replacement rate from mandatory schemes for people entering the labour market now averages 59% in OECD countries at the average‑wage level (Figure 1.29). In Slovenia, it is slightly higher at 63%.24 There is a substantial cross-country variation, from less than 30% for example in Lithuania to 90% or more in Austria, Italy, Luxembourg, Portugal and Turkey. This compares to 60% and 64% for men and women retiring in 2021.

However, accounting for differences in life expectancy, retirement ages and indexation rules, the net pension wealth will be much larger in Slovenia than in the OECD on average even though replacement rates at retirement are similar. The net pension wealth measures the total discounted value of the lifetime flow of all retirement incomes in mandatory pension schemes at retirement age in number of years of net wages. It is a summary measure of total pensions that are expected to be paid throughout the retirement period. For average earners, net pension wealth for men is 10.6 years and for women 11.7 years of net average wages in the OECD on average. It is substantially higher in Slovenia at 13.6 and 15.2 years, respectively. This indicator varies from less than 6 years for both men and women in e.g. Lithuania to 21.4 years for men and 23.5 years for women in Luxembourg. For low earners, net pension wealth stands at 12.4 and 13.8 years for men and women on average among OECD countries while it is very high in Slovenia, about 8‑to‑9 years higher at 20.2 and 22.9 years for men and women, respectively, second only to Luxembourg.

For average earners, the net replacement rate is 10 percentage points higher than the gross replacement rate on average in the OECD due to the effect of progressive taxation and contributions paid by employees as well as favourable tax treatment of pensioners in some countries. The difference is over 30 percentage points in Hungary and Turkey and 15‑20 percentage points in Belgium, Portugal and the Slovak Republic, and 21 percentage points in Slovenia. In Hungary, the Slovak Republic and Turkey, pension income is liable for neither taxes nor social security contributions, whilst in Belgium, Portugal and Slovenia pensioners are granted higher tax allowances than workers.

Figure 1.29. Future net replacement rate in Slovenia is close to the OECD average

1.6.2. … while low earners with full careers benefit from high replacement rates

In most OECD countries, low earners benefit from progressive pension calculation or qualify for minimum pensions or targeted benefits. As a result, low earners often have higher replacement rates than average earners. Low-income workers at half the average wage would receive net replacement rates averaging 69% among OECD countries, compared with 59% for average‑wage workers (Figure 1.30).

In Slovenia, the future net replacement rate for low earners is equal to 95%, much higher than the OECD average, and 25 percentage points above that for average earners. The minimum reference wage is the main driver of this pattern while progressive taxation of labour earnings also plays a role to some extent. This high replacement rate is similar to levels in Austria, the Czech Republic and Hungary. Denmark is at the top of the range with 105%. At the other extreme, Chile, Japan, Lithuania, Mexico and Poland offer net replacement rates below 50% to low-income earners, implying a very low pension even after a full career. As for high earners at twice the average wage, the net replacement rate is 51% on average in OECD countries, below the 59% figure for average earners. Replacement rates for these high earners are higher than 80% in Hungary, Italy, Luxembourg, Portugal, and Turkey, while at the other end of the spectrum, Ireland, Lithuania, New Zealand, Switzerland and the United Kingdom offer a replacement rate of less than 25% from mandatory schemes. In Slovenia, the high earners can expect a net replacement rate of 59%, which is slightly lower than for average earners, at 63%.

Figure 1.30. Future net replacement rate is high for low earners in Slovenia

1.6.3. Prolonged unemployment spells require retiring later to avoid penalties

The full-career case is instructive for capturing the impact of key pension parameters, but falls short of being representative. Many individuals experience some periods of unemployment or enter relatively late in the labour market for example due to tertiary education. In terms of pension entitlements, most OECD countries aim to protect against at least some gaps in the employment record.

Average‑wage workers with five years of unemployment will have a pension equal to 94% of that of a full-career worker on average across OECD countries, with substantial cross-country variation (Figure 1.31). In some countries, workers in this case will have to retire later than the normal retirement age to avoid pension penalties. This includes Greece, Luxembourg and Portugal, where workers in this situation have higher benefits than full-career workers. At the bottom of the range, Australia, Chile, Estonia, Korea, Mexico, the Slovak Republic and Turkey have limited pension protection against unemployment risks and the future benefit is equal to about 87% of that of a full-career worker.

In Slovenia, a five‑year unemployment break in the middle of the career implies retiring at age 65 rather than at age 62 as is the case for full-career workers, and with lower pension. Pension entitlements accrue only in the first year of the unemployment spell based on unemployment benefits, which are equal to 80% of previous earnings in the first three months and 60% in the following nine months. Hence, the five‑year break creates a four‑year hole in pension accruals. When retiring without penalty is possible at age 65, the insurance period will still be one year shorter compared to the full-career case. As a result, despite retiring three years later, the five‑year career break lowers pension benefits by 2.3% compared to the full-career case. In Slovenia, accruals lost during the career break similarly affect pensions of workers with average and low wages whereas many OECD countries provide better cushioning to low earners. However, low earners already benefit greatly from the effects of the minimum reference wage as explained before.

Figure 1.31. Gross pension entitlements of low and average earners with a five‑year unemployment break versus workers with a full career

1.6.4. Pension credits cover part of childcare periods

Many individuals, often women, interrupt their career to care for children. Pension credits for childcare typically cover career breaks until children reach a certain age. They are generally less generous for longer breaks and for older children. Many OECD countries credit time spent caring for very young children (usually up to 3 or 4 years old) as insured periods and consider it as paid employment for pension purposes. In addition, Hungary, Italy, the Czech Republic and the Slovak Republic currently relax pension eligibility conditions based on having children; the last two countries in this list will eliminate these relaxations.25

Figure 1.32 shows the case of average‑wage female workers taking a five‑year career break to care for two children. In that case, the future pension is equal to 96% of the full-career case on average across OECD countries, under the strong assumption that these women resume their career at the same wage level as those who continued to work (Figure 1.32). The pension level is not affected by such a career break in nine countries including the Czech Republic and Hungary. At the other extreme, average‑wage women caring for children during five years will have a pension at least 10% lower in Australia, Chile, Iceland, Latvia and Mexico.

With the childcare break, Greece and Slovenia require that women retire later than the normal retirement age – five years in Greece, two years in Slovenia – to avoid benefit penalties. As a result, benefits are projected to be 5% higher than for the full-career worker in Greece. In Slovenia, maternity and parental leaves accrue pension entitlements in the first year of a child’s life at the level of 100% of previous earnings up to a ceiling.26 Additionally, provided the woman fulfils the full-retirement condition when retiring, she then receives a pension bonus equivalent to one‑year accrual for each child (of up to three). Thus, while career breaks for childcare may affect the reference wage, their impact on pensions goes mainly through any lost accruals for part of the breaks.27

In Slovenia, a woman who enters paid employment at age 22 and takes five years out of work to care for two children will have been insured for 37 years at age 62 (37 years = 40 years – break of 5 years + 2 years covered). The earliest age at which she can retire without penalty is 63 years and 8 months with 39 years of insurance as the retirement age at 65 can be lowered by 16 months for having cared for two children.28 In that case, these two additional years will accrue pension entitlements if she works, but she will not receive the bonus for childcare. She will end up with a benefit being 1.2% lower than in the case of a woman born the same year retiring at age 62 with 40 years of insurance once pension indexation is taken into account. An alternative that is not shown in Figure 1.32 is for her to retire at age 65, when she will benefit from the pension bonus equivalent to 2 years of insurance. Her pension will then be 5.8% higher compared to the full career case and 7.1% higher than in the case of retiring at 64 after the childcare period.

Figure 1.32. Childcare periods might require retiring later to avoid penalties in Slovenia

1.6.5. Pensions are higher for civil servants thanks to an additional funded scheme

Slovenia, along with ten other OECD countries including Austria, Denmark and Norway, has a top-up mandatory component for civil servants above and beyond the mandatory scheme that exist for private sector workers. Only Belgium, Germany, France and Korea have an entirely separate scheme for civil servants. About two‑thirds of OECD countries have no special scheme for civil servants, all employees being covered under the same mandatory schemes, at least for new labour market entrants, or they offer benefits similar to those for private‑sector workers based on technically separate schemes, the difference lying mainly in the administration of the schemes.

In Slovenia, the top-up component for civil servants consists of a separate occupational defined contribution scheme. The employer (ultimately the state) pays additional contributions to the occupational scheme at the most common flat rate of EUR 30.53 a month in 2020,29 valorised with the average‑wage growth of civil servants, while employees do not pay any contributions. At the national average wage, EUR 30.53 adds 1.7 percentage points to the regular contribution rate of 24.35% to the universal scheme. Following standard assumptions in the OECD pension modelling for funded defined contribution schemes,30 a civil servant retiring in 2060 after earning the average wage for a full career can expect to have a gross pension that is 11% higher than a private sector employee with the same earnings. While significant, this 11% difference is relatively small compared with other countries having a top-up or totally different schemes, especially relative to Canada, Germany, the United Kingdom and the United States. A separate analysis of supplementary pension schemes provides more information about this scheme.

1.7. Pensions for self-employed workers in Slovenia

1.7.1. Same total contribution rates as for employees in Slovenia

The pension coverage of the self-employed varies considerably across OECD countries although most require the self-employed to participate in earnings-related pension schemes. In 18 countries, self-employed workers are mandatorily covered by earnings-related schemes, but the pension coverage is limited as they are allowed to contribute less than employees through reduced contribution rates, a high degree of discretion in setting their income base often resulting in only minimum contributions being paid, or minimum income thresholds below which they are exempt from contribution obligations.

In half of the countries including Slovenia, mandatory contribution rates are aligned between dependent workers and the self-employed: the self-employed pay a contribution rate that corresponds to the total contribution rate of employees, i.e. the sum of employee and employer contributions, which is equal to 24.35% in Slovenia. Beyond Slovenia, this includes Canada, the Czech Republic, Estonia, Finland, Greece, Hungary, Korea, Latvia, Lithuania, Luxembourg, Poland, the Slovak Republic, Turkey and the United States. Among them, the self-employed contribute based on income in only ten OECD countries, including Slovenia. However, even there, insufficient compliance with pension rules may undermine pension coverage (OECD, 2019[2]). In the other countries with earmarked pension contributions, contribution rates are lower for the self-employed.

1.7.2. Less contributions paid and less entitlements accruing due to base effects

Even when nominal contribution rates are the same for dependent employees and self‑employed workers, pension contributions can differ substantially because the contribution base, i.e. the earnings reference to calculate contributions, is not identical. For employees, pension contributions are usually paid on gross wages, which are equal to total labour costs minus the employer part of social security contributions. For the self-employed, there is no genuine equivalent of gross wages.

Most countries use some income‑related measure as the contribution base for the self-employed. Depending on the country, this measure is income either before or after deducting social security contributions. A number of countries apply the contribution rate to a fraction of gross income, e.g. 50% in the Czech Republic, 67% in the Slovak Republic, 75% in Slovenia and 90% in Lithuania.

In Slovenia, the calculation of the contribution base of the self-employed results in less pension contributions and less pension entitlements compared to employees with similar earnings net of social security contributions. The contribution base for a self-employed person is equal to previous year’s profit before taxes increased with social security contributions and multiplied by 75%. For dependent workers, the total contribution rate of 38.2% is split between 22.1% paid by employees and 16.1% by employers.

For an income of 100 after paying social contributions and before tax, the contribution base for employees is equal to the gross wage, i.e. to 100 / (100% – 22.1%) = 128.37 with pension contributions of 31.26 (11.36 paid by employeyers and 19.90 by employees). For the self-employed with the same income of 100 after paying social contribution and before tax (assuming the same profits as the previous year), the contribution base is equal to 100 / (1 – 75%*38.2%) * 75% = 105.12, with pension contributions paid of 25.60. Hence, the self-employed pay about 18% less contributions and accrue less pension entitlements when having the same declared income before tax as employees.31 To fully align the contribution bases with employees, the 75% coefficient used to calculate contribution base of the self-employed workers would need to increase to 86%.

Self-employed workers with a taxable income equal to the net average wage before tax can expect to receive in the future – after contributing what is mandatory during a full career – an old-age pension equal to 79% of the theoretical gross pension of the average‑wage worker in the OECD on average (Figure 1.33). In Slovenia, taking also into account past references for profits, the reduced contribution base results in lower pensions from mandatory earnings-related schemes, at 86%, of that of employees with the same taxable earnings. Much lower theoretical relative pensions for the self-employed – between 40% and 60% of employees’ pensions – are estimated in Poland, Spain and Turkey where only flat-rate contributions to earnings-related schemes are mandatory for the self-employed, and in Latvia, where mandatory contributions above the minimum wage are reduced substantially.

Figure 1.33. Theoretical pensions of the self-employed are lower than those of employees

1.7.3. Very high minimum contribution base

Most countries set minimum income thresholds and/or minimum contribution bases. Minimum income thresholds are minimum levels of income below which the self-employed are exempt from regular mandatory pension or social security contributions; in that case, they do not accrue regular pension entitlements either. These thresholds exist in eight OECD countries, but not in Slovenia, ranging from 11% of the average wage in Ireland to around 50% in the Slovak Republic and Turkey.

Minimum contribution bases are minimum amounts to which pension or social security contributions for the self-employed apply, even if true income is lower. They prevent the self-employed from contributing very low amounts, but they also imply that the effective contribution rate might be high for individuals earning less than the threshold.

In Slovenia, the contribution base cannot be lower than 60% of the average wage, which is the highest level across OECD countries (Figure 1.34). Only Poland has the same value, but it allows the self-employed to lower their contributions for a limited period if their revenue is low. Hungary, Italy, Latvia, Lithuania, Luxembourg, the Slovak Republic, Spain and Turkey set the minimum contribution base around 40%‑50% of average wage, while other countries set it lower. France, the Netherlands and Portugal set neither minimum contribution base nor minimum income threshold.

Figure 1.34. Contribution base for mandatory pensions for the self-employed in OECD countries

The gross (taxable) profit for the self-employed is determined by deducting costs from revenues for a given calendar year. There are two ways to account for costs in Slovenia. The first is to use actual costs. Alternatively, the self-employed can choose to use a flat-rate cost regime that sets profits at 20% of revenues. This option is available to the sole self-employed having revenues below EUR 50 000, or below EUR 100 000 if employing any workers. Similar flat-rate cost deductions to calculate the contribution rate exist in the Czech Republic and Portugal.

Pension contributions are mandatory for the self-employed unless they are also insured as employees. In December 2019, among those who paid contributions based on self-employment income, 47 037 self-employed were registered under the actual cost regime and 26 714 under the flat-rate regime. Additionally, there were 9 504 and 21 773 self-employed registered under the actual and flat-rate regimes, respectively, who did not contribute towards pensions from their self-employed income as they were insured also as employees. The self-employed choosing the flat-rate regime operate in sectors where costs are rather low: legal/accounting jobs, arts, IT and communication, and manufacturing (OECD, 2018[13]). The actual cost regime is chosen by the self-employed who operate in the sectors with higher costs: construction, wholesale and retail trade, manufacturing, legal/accounting jobs, transportation, and accommodation and food. The number of self-employed in the flat-rate regime more than tripled since 2014.

Given the high minimum contribution base and the possibility to opt for the flat-rate cost regime, almost 70% of the self-employed paid pension contributions from the minimum base in 2016 (Stropnik, Majcen and Rupel, 2017[14]). In Poland, the Slovak Republic and Spain, 70% or more of the self-employed also pay only compulsory minimum pension contributions (Spasova et al., 2017[15]).

The 2018 OECD Tax Policy Review of Slovenia suggested that the minimum contributions base should be abolished or equal to the minimum wage of full-time employees, which was equal to 50% of average wage,32 to be better aligned with the rules applying to full-time employees and to prevent creating cash-flow problems for the self-employed with variable income (OECD, 2018[13]). This OECD Review also suggested that the 20% revenues used for profits in the flat-rate regime could be increased substantially to better reflect the actual costs of the self-employed.

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Annex 1.A. Combining work and pensions in OECD countries: Implications for Slovenia

Introduction

Flexible retirement is an important topic for policy makers. The current choice between being employed and being retired is too binary in most countries. Providing flexibility in drawing pensions might be beneficial for people’s well-being and the society as a whole. However, this objective needs to be reconciled with inherent constraints imposed by pension systems in particular to prevent individuals from finding themselves with too few resources at old ages. Hence, total flexibility might be inconsistent with the very idea of a pension system that provides for old-age security; a compromise therefore needs to be found, in particular, on meeting a set of eligibility conditions. This annex summarises policies related to combining work and pensions in OECD countries, describes the Slovenian policy setting in this area and suggests options for improvements.

Few OECD countries restrict combining work and pensions at normal retirement age

Combining work and pensions is possible in most OECD countries but the conditions for doing so vary. All countries allow pensioners who have fully retired to engage in paid work but earnings from this employment can affect pension payments in different ways. This depends on the design of a pension system and its individual components as well as rules governing claiming pensions once earnings from work reach a certain level. Limited obstacles to combining work and pension receipt make pension systems more flexible. However, introducing greater flexibility should not be costly for the pension system, which implies that there should be some form of actuarial adjustment of pension benefits when combined with work.

Eligibility to combine work and pensions generally requires fulfilling the conditions to get a full pension, i.e. without penalty. However, 11 countries allow combining work and early pension receipt from their PAYGO scheme: Austria, Belgium, Canada, the Czech Republic, Finland, France, Germany, Greece, Japan, Norway and the United States.33 If people make pension contributions while working and receiving an early-retirement benefit, pensions are either recalculated each year to reflect these new contributions, or once the pension is eventually claimed.

Combining work and pensions after the official retirement age – and when pension eligibility conditions are met – is possible in all OECD countries. However, disincentives to do so exist in several of them. Australia, Denmark, Greece, Israel, Japan, Korea and Spain limit the amount that people can earn while receiving pensions, beyond which pension benefits are reduced (Annex Box 1.A.1). These earnings limits imply that labour income taxation is higher beyond the limit, which significantly reduces the incentives for retirees to work while receiving their earned pension entitlements. Moreover, in France, working retirees on a full pension do not earn any additional pension entitlements even though they have to pay pension contributions; in this case, there is thus a pure tax on continuing to work. A few countries, including Finland, France, Italy and Poland, require that the initial work contract is terminated to be able to claim a full pension and therefore to combine work and full pensions. Outside the OECD, Croatia allows combining pension with part-time work (less than half time). Removing such obstacles is important to make combining work and pensions more attractive.

Annex Box 1.A.1. Earnings limits to combining work and pensions in OECD countries

Seven OECD countries apply limits to post-retirement earnings, above which pension benefits are reduced. Danish pensioners can earn up to two‑thirds of average earnings before their earnings-related benefit is reduced, and on top of this the means-tested supplement is reduced for earnings above 15% of the average wage. In Greece, the monthly pension benefit of an individual aged over the retirement age who continues to work is reduced by 30% if earnings are above the social security threshold. In Israel, there is a withdrawal rate of 60% for each shekel of earned income above 57% of the average wage up to age 70, after which there is no earnings limit. Likewise in Japan, for ages 65‑69, when the total income exceeds JPY 460 000 (108% of average earnings), pension benefits start to be reduced. In Korea pensioners aged 61 or over will only receive 50% of the pension if they have earnings above the average of those insured. In Spain, the pensions of individuals who continue to work after age 67 are reduced by 50%. In Australia, there is no restriction to combining work and pension receipt of the defined contribution Superannuation guarantee component. However, when eligible to the means-tested Age Pension, the only public pension benefit, then a reduction is likely. Although a small amount of earnings are exempted from the income test in the calculation of the Age Pension earnings exceeding 14% of average result in a pension reduction, if there is no income from other sources.

Source: OECD (2017[16]), Pensions at a Glance 2017: OECD and G20 Indicators, https://dx.doi.org/10.1787/pension_glance-2017-en and (2021[1]), Pensions at a Glance 2021: OECD and G20 Indicators, https://doi.org/10.1787/ca401ebd-en.

Combining work and pensions in Slovenia

Slovenia also has some unique features in the design of the rules allowing to combine work and pension. Combining the receipt of an old-age pension with full-time work is called dual status in Slovenia.34 After fulfilling eligibility conditions to an old‑age pension, there is no earnings cap to be able to combine with claiming a pension nor any earnings limit beyond which pension benefits are reduced. However, since 2020, when working full time only 40% of the old-age pension can be claimed for the first three years and 20% thereafter, which is called partial payment of pensions. This implies a mandatory deferral of 60% or 80% of the benefit when working. The same rules apply to people who re‑join employment after having retired, but claiming early pension cannot be combined with full-time employment. Before 2020 and since 2016, the share of pension eligible with full-time work was 20%. Between 2012 and 2016, the conditions were tighter and 20% of pension was paid only until age 65 to those who had not reduced working hours after qualifying for a pension. Re‑joining full-time employment after having retired resulted in pensions being fully suspended. Before 2012, it was possible to combine work and pensions only when working less than half time.

Phased retirement – combining part-time work and partial pensions – is possible in Slovenia when meeting the eligibility conditions to pensions. Before 2020, working part-time allowed claiming a pension benefit that was proportional to the reduction of working hours compared to full time, which was and still is 40 hours a week in Slovenia. For example, working 75% of full time (i.e. 30 hours a week) resulted in receiving a benefit equal to 25% of the acquired pension. Since 2020, this share is topped up by 40% of the pension prorated by the share of the time spent working, for the first three years, and only if working at least half-time and meeting the eligibility conditions to a full pension. Thus, someone working 30 hours receives a share of the acquired pension equal to 25% + 40% * 75% = 55% (Annex Figure 1.A.1). Drawing a pension neither relaxes the obligation to pay contributions nor limits entitlements accruing while working.35

When a person fully retires after having combined work and pension, the pension is recalculated to account for both additional accruals and possible changes in the reference wage (pension base).36 The reference wage is based on the best 24 consecutive years and, thus, it might increase if a person received high wages in additional years of work. Additionally, the reference wage is likely to increase because past wages are valorised with average wage growth. This tends to increase deferred pensions as pensions in payment in Slovenia are indexed to 60% of wage growth and 40% of price inflation: combining work and pensions implies that past entitlements follow wage growth while pensions in payments are indexed less favourably in normal times.

Annex Figure 1.A.1. Pensions are reduced when combined with full- and part-time work

Policies raising obstacles to combining work and pension are in retreat

What are the reasons for the above obstacles to combine work and pensions found in OECD countries, in particular in the form of earnings limits? Facilitating combining work and pensions aims at improving individuals’ choices at older ages, and might raise retirement income. This complements other goals that are often seen as the main objectives of the pensions system, such as preventing old-age poverty and limiting income drops at retirement. Some consider that eligibility conditions to pension must involve quitting the labour market definitively, thereby negating the rights of individuals to draw already accrued pension entitlements if they continue to work.

To support these views, it is often, more or less implicitly, argued that working at older ages limits working opportunities for individuals of younger ages, the so-called lump of labour fallacy, akin to the idea of a fixed amount of jobs in the economy. Although this idea might apply well for a single company, it is contradicted by solid empirical evidence37 at the economy level, and has therefore been regularly criticised and rejected by many researchers and institutions, including the OECD. There might be temporary situations, however, for example during economic recessions, when the economy operates below its potential, generating short episodes through which the overall number of jobs is constrained. This argument is in some cases expressed more strongly, based on ethical grounds: pensioners should be retirees and not take other people’s jobs.

The ethical argument sometimes extends to the idea that pensions primarily aim at avoiding income drops at retirement and that full-time workers, regardless of age, do not need pensions to make a living. According to this view, it is not fair that the society faces the financial cost of providing pension benefits to these workers. However, the key point is that there is no extra cost stemming from the decision of these people to keep working while drawing the pension rights they built up. Pensions would have been paid similarly if they retired totally.

Actually, some countries, such as France with its 1982 legislation, had raised obstacles to combine work and pensions; at the time promoting early retirement was popular in the OECD in order to deal with the increase in structural unemployment. Since then, however, there has been a wide consensus that such policies restricting employment at older ages run counter to efforts to cope with population ageing. This extends to measures raising obstacles to combine work and pension, and countries have tended to remove or substantially reduce these obstacles. Promoting longer working lives is a critical objective in many countries, and in Slovenia in particular, to deal with higher life expectancy.

Working longer generates positive aggregate effects, e.g. through higher output and tax revenues. As a result, on top of benefiting the individuals who combine work and pensions, it is also beneficial for the economy and society as a whole; hence this leads to a Pareto improvement as some people gain while nobody loses. In short, the main historical motivation of policies such as imposing earnings limits to combining work and pensions has lost steam; these policies still limit public spending by reducing pension payments compared with accrued entitlements that would have been paid without working after the retirement age.

The OECD has recommended to remove obstacles to combine work and pensions from the normal retirement age. The main message is that the rules to draw pensions should not be linked to the work status. Contributors have acquired pension entitlements which they should be able to draw once they meet eligibility conditions, irrespective of whether they work or not, and if they work, irrespective of their earnings, hours worked and employment contract. Likewise, older workers should be able to work irrespective of whether they receive their pension benefits.

A complex design: partial payment of pensions, higher accrual rates and actuarial neutrality

Paying only 40% of pension when people have met the age and insurance‑length eligibility conditions provides substantial savings to the pension scheme in Slovenia. This is because the 60% difference that is foregone does not benefit from any bonus while it is deferred (see below). Paying 100% instead of 40% of pension in dual status for one year would raise both total discounted spending and the present value of total pension benefits, i.e. pension wealth, at age 60 by 2.8% (Annex Box 1.A.2).38

However, for the first three years after fulfilling the eligibility conditions to an old-age pension, but not to an early-retirement pension, the pension scheme provides a higher accrual rate of 3% instead of 1.36% prior to meeting the eligibility conditions to pension.39 Relative to maintaining 1.36%, this higher accrual rate increases pension benefits (and therefore pension wealth) by 2.5% for one additional year of work.

Annex Box 1.A.2. Combining work with partial payment of pensions is almost actuarially neutral but expanding the access to full pension requires some parametric adjustments

The Table A.1 shows pension levels from age 60 and the pension wealth (net present value of future pension flows) in real terms for various scenarios, all assuming a full career from age 20. Panel A focuses on today’s rules** while Panel B provides estimates based on actuarial neutrality. For example, row 1 displays the case of a person retiring at age 60 under current rules.

There are strong disincentives to deferring pension in Slovenia once eligibility conditions are met. In the studied case, at age 60 deferring benefits by one year is not compensated through a bonus scheme (row 2): benefits are only slightly higher compared to the case of no deferral (row 1) due to more favourable valorisation of past wages compared to benefit indexation. Hence, 4% of pension wealth is lost. By comparison, row 6 shows the actuarially adjusted benefits in the case of deferring: actuarial neutrality (Annex Box 1.A.3) is achieved through applying a yearly bonus of 4.4% per year of deferral, leading (by definition of actuarial neutrality) to the same pension wealth as in row 1.

When the pension is deferred by one year while working, benefits increase by a further 4.7% from age 61 due to the higher accrual rates of 3% (row 3 versus row 2). Working this additional year almost does not increase pension wealth compared with row 1, while in the actuarially neutral case pension wealth increases by 2% (row 7 versus row 6).

Combining the higher accrual rate with claiming part (40%) of pension (row 4) leads to almost the same pension wealth as in the actuarially neutral case (row 8). Thus, the current rules for combining work and pensions lead to almost actuarial neutrality, but in a complex way. Were the part of pension used for combining with work increased from 40% to 100% without other parametric adjustments (row 5), the pension wealth would increase by almost 3%, generating costs for public finances. Row 9 shows the benefit profile in that case (claiming 100% of pension while working) under actuarial neutrality, leading to the same pension wealth as in rows 7 and 8. Yet, the benefits from age 61 in row 9 are 3% lower than in row 5 due to the accrual rate of 1.36% instead of 3%.

	Age				Pension wealth at age 60
	60	61	…	80	base: pension at age 60 in case 1=100	base: pension wealth in case 1=100%
Panel A. Following today’s pension rules
1. Claiming pension at age 60	100.0	100.8	…	116.1	2136	100.0%
2. Deferring 100% of pension by 1 year without working	0.0	101.3	…	116.7	2046	95.8%
3. Deferring 100% of pension by 1 year while working	0.0	106.0	…	122.2	2143	100.3%
4. Claiming 40% of pension for 1 year while working	40.0	106.0	…	122.1	2183	102.2%
5. Claiming 100% of pension for 1 year while working*	100.0	106.0	…	122.2	2243	105.0%
Panel B. Theoretical case assuming that benefits are adjusted actuarially
6. Deferring 100% of pension by 1 year without working	0.0	105.7	…	121.8	2136	100.0%
7. Deferring 100% of pension by 1 year while working	0.0	107.9	…	124.3	2180	102.1%
8. Claiming 40% of pension for 1 year while working	40.0	105.9	…	122.0	2180	102.1%
9. Claiming 100% of pension for 1 year while working	100.0	102.9	…	118.6	2180	102.1%

Note: Based on the 40 year insurance period at age 60. Calculations assume an annual real wage growth of 1.25% and an annual real discount rate of 2%. The actuarial neutral bonus is calculated at 4.4% and the regular accrual rate for cases 7‑9 is 1.36%.

*Claiming full pension while working full time is not possible today. Following today’s law the 3% accrual rate when combining work and pensions is assumed in row 5.

** The current pension law states that the accrual rates of men will converge to those of women by 2025. These future gender-neutral rules are assumed in this box.

Source: OECD calculations.

Taking into account the payment of 40% of pensions discounted over the remaining expected life expectancy on top of the higher accrual of 3% increases the pension wealth close to actuarial neutrality (Annex Box 1.A.3). That is, the net present value of past entitlements when accounting for both the partial payment of pension and the 3% rate is similar to receiving 100% of the pension benefit at age 60, but without benefiting from the higher accrual (Annex Box 1.A.2). This means that these options are neutral for public finance over time.40

Annex Box 1.A.3. Actuarially neutral bonus for deferring the pension

The actuarially neutral bonus depends on the retirement age, mortality rates, the discount rate and the indexation of pension in payments, but not on the other parameters used to compute pension benefits. It is therefore unrelated to what pension systems actually deliver. On average across countries, actuarial neutrality implies a bonus of about 5.5% on past entitlements for each year of deferral (Figure A.2).

Slovenia belongs to countries in which the bonus implied by actuarial neutrality is among the lowest due to the low normal retirement age at 60 as it results in a long period for which people claim pension on average. Conversely, in Denmark the long-term retirement age is projected to be 74 years as the increases in pension age are designed to result in an average of only 14.5 years in retirement, meaning that a much larger penalty or bonus, of about 7.5%, ensures actuarial neutrality at that age.

Hence, actuarially, the bonus for working longer should increase with age. By contrast, in Slovenia, both the accrual rate and the part of pension being paid out significantly decline after 3 years of combining work with claiming pension.

Annex Figure 1.A.2. Actuarially neutral annual bonus on past entitlements at the normal retirement age

In most countries with defined benefit schemes, deferring the receipt of a pension leads to higher benefits on accumulated entitlements through a bonus scheme. The bonus is actuarially neutral if the additional pension actuarially offsets the foregone pension payments while deferring. On average in the OECD, the actuarially-neutral bonus would be around 5% (Annex Box 1.A.3). It applies to past entitlements whether or not individuals continue to work. In principle, it should also apply to individuals who combine work and pensions on the part of the pension that is not withdrawn while working.

In Slovenia, there is no such bonus scheme, and if people defer their pension they just temporarily lose the benefits without any offsetting effect through higher pensions later on. This limits flexibility in drawing pensions, as people have no interest in not taking 100% of their pensions whether they continue to work or not. To overcome the absence of the bonus for deferring pension receipt, Slovenia opts for a higher accrual rate for additional years, which leads to close to actuarial neutrality when combined with the cap of 40% on pensions. Paying only a part of pension and offering higher accruals for additional years of work is a very complex way to achieve this (Annex Box 1.A.2).

Policy options

The above analysis leads to the following conclusions. There is no obvious reason why there should be any restriction to combine work and full pensions when combining is not costly for public finances, i.e. when total flexibility to combine work with a full pension does not deteriorate pension finances in the long run. In the past, some countries raised such obstacles based on arguments related to the “lump of labour” fallacy or outdated views, especially given health improvements at older ages, which associated pension receipts with the inability to contribute to society through working. Most OECD countries have considerably relaxed the conditions allowing to combine work and pensions while preserving acquired pension rights.

Likewise, terminating the employment contract is generally not used any more as an eligibility condition to receive a full pension. Only a few countries, including Finland, France, Italy and Poland impose such a constraint nowadays. The conditions allowing combining work and pensions should depend neither on the type of employment contracts nor on the employment history. In particular, they should not require terminating the employment contract nor provide restrictions when re‑entering employment after having retired.

In order to assess whether combining work and pensions is not costly for the public purse, it is crucial to estimate how far from actuarial neutrality the possibility to combine is. In defined benefit schemes, actuarial neutrality is usually achieved by granting well-calibrated bonuses on deferred pension benefits, i.e. benefits that are not withdrawn after meeting full eligibility conditions. Slovenia is among the few countries which do not grant any compensation for deferring pensions; thus, individuals lose if they do not take their pensions as soon as they are eligible. However, when combining work and pensions, Slovenia manages to achieve actuarial neutrality through a complex mechanism including a much larger accrual rate for extra years of work and access to a partial payment of pension (40% in case of full-time work).

Allowing to take 100% of pensions when eligibility conditions are met while working would remove some obstacles to flexible retirement, but it would be very costly for public finances based on current parameters (Annex Box 1.A.2). Such a reform would therefore have to be accompanied by parametric adjustments.

The first option would be to limit the accrual rate for extra years to the regular 1.36% that applies to prior years, thereby limiting the 3% higher accrual to those who withdraw 40% of their pension only. While this will render drawing full pensions while working financially acceptable, this solution would add to the already complex structure.

The second option would be to introduce a standard bonus scheme and replace the 3% higher accrual rate by the regular accrual rate. For example, once eligibility conditions are met, deferring pensions on accumulated entitlements would lead to a higher pension of about 4%‑4.5% per year of deferral (about 1% per quarter).41 While this bonus would apply to deferred pensions, it should not apply to pensions combined with work.42 Individuals could then decide to either defer claiming the pension and benefit from the bonus or receive the pension without any bonus, while accruing additional pension entitlements from working but at the same rate as before drawing pensions.

The third option is similar to the second one, but with an element to nudge behaviours about working longer. For individuals who continue to work after having met the full-pension conditions, they would not pay employees’ pension contributions and employers’ pension contributions would be paid as additional income without generating any additional pension entitlements, whether working these extra years are combined with pensions or not. Thus, individuals would have the same choice as under the second option, but no additional pension entitlement would accrue, employees would not pay pension contributions and employers’ pension contributions would be paid as additional wages.

Whatever the option selected, it is important to ensure a high level of transparency in the communication of accrued entitlements. People should be in a position to easily assess the consequences of their decisions. Whether pensioners benefit from such a framework to combine work and pensions depends on their capacity to make well-informed choices, based on their individual situation and preferences, to avoid jeopardising their final retirement incomes.

Combining work and pensions was discussed in the 2016 White Paper. The authors proposed that retirees should have the right to receive: a full pension while working full time after age 65; and, a reduced pension before age 65 with the pension being reduced proportionally to earnings. The eligibility condition to pension at age 65 with 15 years of insurance was portrayed as the basic criteria while the requirement of age 60 with 40 years of insurance period (without purchase)as an exemption. Yet, it is difficult to justify why the age of 65 should be used as a criteria to be able to combine work and full pensions, which can be eligible without working much earlier than at age 65.

However, as explained above, introducing the possibility to fully combine when standard conditions are met should not be made without adjusting accrual rates. Moreover, it is true that current old-age eligibility conditions (60 years of age, 40 years of insurance without purchase) are loose in international comparison. The risk is always to have people retiring too early at an age when the pension system can deliver low pensions only. Given people’s generally short-sighted behaviour when it comes to retirement planning, there is a trade‑off between greater autonomy left to individuals and income adequacy throughout retirement. Policies that de facto restrict flexible retirement at an early age might therefore be needed. Hence, the minimum retirement age should be set high enough to make sure that individuals accumulate sufficient pension entitlements.

Reforming those conditions is necessary, but in many ways combining work and pensions refers to a different instrument targeting a specific objective. In particular, expanding the possibilities to combine work and pensions has little relation with some objectives typically pursued within pension systems such as smoothing income at retirement or preventing old-age poverty in a financially sustainable way. One important question that would deserve further analysis is whether a greater facility to combine work and pensions might exacerbate issues caused by loose eligibility conditions enabling people to retire too early with possibly too low pensions. Moreover, the OECD does not support earnings-limit on combining work and pensions. In short, the first best policy recommendation is probably to better align retirement-age and contribution-period conditions with international practices and remove obstacles to combining work and pensions.

Annex 1.B. Mandatory retirement in OECD countries: Implications for Slovenia

Introduction

Mandatory retirement rules give employers the option to terminate contracts of older workers at a certain age (OECD, 2017[16]). Laws, collective labour agreements or employment contracts can stipulate the termination of the employment relationship upon the employee reaching a certain age. Countries may facilitate the use of mandatory retirement by including age limits in employment protection legislation or by easing restrictions on layoffs from a certain age. The Slovenian Parliament lifted employment protection of workers eligible to an old-age pension in December 2020, which effectively introduced mandatory retirement.

Mandatory retirement ages might affect the financial sustainability of pension systems by reducing the number of contributors and increasing the number of beneficiaries. In order to improve financial sustainability and give older people more choices, the OECD recommends tackling barriers to employment of older workers. One of the recommendations to achieve this goal, adopted by the Council of the OECD on Ageing and Employment Policies, is that countries seek to discourage mandatory retirement in close consultation and collaboration with employers’ and workers’ representatives. The OECD does acknowledge that ‘in a limited number of instances’ mandatory retirement practices may be necessary (OECD, 2018[17]).

Strictly speaking, mandatory retirement is a matter of labour market regulation and employment protection. Yet, the practice is inextricably linked with the pension system. In countries where mandatory retirement is still allowed, the mandatory retirement age is at or beyond the moment when an employee becomes eligible for an old-age pension. In these countries, income security via the pension system is considered the minimum requirement to reduce employment protection.

This annex sheds light on the conditions sometimes put forward to justify mandatory retirement, first legally and then economically. Subsequently the mandatory retirement framework is compared across OECD countries. Then, the extent to which the Slovenian labour market might offer a suitable context for mandatory retirement is discussed. The last section provides a short conclusion. While the introduction of mandatory retirement in Slovenia is uncertain as it has been appealed in the Constitutional Court on the ground of discrimination, the annex takes the mandatory retirement regulation passed by the Slovenian Parliament as the current Slovenian policy.

European Union framework on mandatory retirement

In its 2012 White Paper on Adequate, Safe and Sustainable Pensions, the European Commission stipulated the need to revise ‘unwarranted’ mandatory retirement ages in order to facilitate working longer (European Commission, 2012[18]). In line with AGE Platform Europe’s demand to ban mandatory retirement practices altogether (AGE Platform Europe, 2009[19]), the European Parliament went one step further in recommending ‘that the Member States, in consultation with relevant partners, put a ban on mandatory retirement when reaching the statutory retirement age’ so as to enable people to continue working if they wish to do so (European Parliament, 2013[20]).43

The statements of the European Commission and the European Parliament entail a commitment to reduce mandatory retirement practices, but bear no legal power. Within the European Union, the Employment Equality Directive (Directive 2000/78/EC) forms the foundation for legislation to combat age discrimination in the labour market. It lays down a framework for what constitutes age discrimination in general, but does not deal with the question of mandatory retirement ages per se.44 Article 6 stipulates that deviations from the principle of non-discrimination based on age are possible ‘if they are objectively and reasonably justified by a legitimate aim, including legitimate employment policy, labour market and vocational training objectives, and if the means of achieving that aim are appropriate and necessary’. In Article 2 (5), the Directive explicitly mentions health and safety concerns as a possible justification for age limits.

The extent to which mandatory retirement ages serve a legitimate aim has been the topic of some legal debate. In most cases, the Court of Justice of the European Union (CJEU) has left it to national courts to decide whether a specific case of mandatory retirement qualifies as age discrimination. Yet in three instances it struck down mandatory retirement provisions. In two cases, it struck down national legislation: a German provision allowing the termination of fixed-term contracts of people over age 52, and a Hungarian law lowering the mandatory retirement age of judges, prosecutors and notaries from 70 to 62. In a third case, the CJEU ruled that a collective labour agreement setting the mandatory retirement age for Lufthansa pilots at 60 years conflicted with the Directive as there was wide international agreement that it was not unsafe for pilots to fly until age 65 (Oliveira, 2016[21]).

The CJEU’s rulings offer a framework setting the boundaries within which the practice of mandatory retirement could be considered lawful (Oliveira, 2016[21]; Dewhurst, 2016[22]). First, the justification should be based on concrete evidence, not mere generalisations or assumptions. Second, any justification for a mandatory retirement age should be occupation- or sector-specific. Safety concerns could be a valid argument for mandatory retirement if there is international agreement that practicing a specific occupation above a certain age could endanger health and safety.45 Third, the availability of a pension is an important condition for mandatory retirement. Mandatory retirement is not allowed before people are eligible to start drawing a full pension. The CJEU does not generally require that pension benefits received upon reaching the mandatory retirement age be high enough to allow for a “reasonable” standard of living for people who can supplement their pension with income from work. However, the CJEU requires it if this concerns workers for whom finding new employment is very difficult, for instance employees with highly specific skills that are not easily transferable. Fourth, the CJEU is generally more reluctant to intervene if the mandatory retirement age was established by a collective labour agreement rather than being unilaterally imposed by the employer, thereby respecting the autonomy of social partners to bargain on work conditions (Dewhurst, 2016[22]).

Economic motivations for mandatory retirement

According to Oliveira (2016[21]), the CJEU’s rulings are underpinned by the idea that mandatory retirement leads to redistribution of employment opportunities between generations and, as such, is a potential form of solidarity between generations. Even though there might be a trade‑off between the employment of older and younger workers in some very specific, well-protected sectors, in the economy as a whole job opportunities for younger people are not reduced when keeping older workers in employment longer (OECD, 2013[23]) – the idea that there is a trade‑off is the so-called lump of labour fallacy.

On top of the lump of labour argument frequently used to justify mandatory retirement ages, two other motivations are connected to the productivity-wage nexus and its development as workers age. A first argument concerns the workers’ wages outgrowing their productivity when seniority is a substantial component in wage setting (Lazear, 1979[24]). When older workers cost more than they produce, mandatory retirement is a tool to reduce wage costs without affecting output (OECD, 2019[25]). There is some evidence that the low mandatory retirement age in France before 2003 was especially used against high-wage earners (Rabaté, 2019[26]). Increasing or abolishing the mandatory retirement age in such a context might reduce efficiency.

A comparison of the impact of increasing the mandatory retirement age in Japan and Korea offers a good illustration of the link between mandatory retirement and seniority-based wages. Seniority plays an important role in wage setting in both countries where it has been a common practice for companies to terminate employment contracts when the employee reached a certain age. In Korea, wage subsidies were granted to older workers in companies that voluntarily increased their mandatory retirement age to 56 (2008 reform), 58 (in 2013) and 60 (in 2016 or 2017 depending on firm size). Over this period, the average age of mandatory retirement increased from 57.1 to 60.2 years. Furthermore, a law enacted in 2013 prohibited mandatory retirement below the age of 60 as of 2017, and encouraged social dialogue on wage‑setting mechanisms. The Tripartite Commission46 set up for this dialogue reached an agreement on a wider labour market reform in 2015, including the so-called ‘wage peak system’ in which older workers accept a wage cut – partially compensated by government subsidies – in exchange for employment security (OECD, 2018[27]). In Japan, a 2004 reform obliged companies to either re‑hire workers who want to continue working after mandatory retirement at age 60, or to increase the mandatory retirement age to 65, or to abolish it altogether. Unlike in Korea, however, this policy was not embedded in a wider labour market reform also tackling wage setting. By 2017, four in five companies still maintained mandatory retirement at age 60, as it allowed them to extend the employment of older workers on less generous employment conditions including lower wages (OECD, 2018[28]).

The second economic argument for mandatory retirement is connected to employment protection legislation. In countries or sectors with high levels of employment protection, it is difficult or expensive for employers to dismiss workers based on their weak productivity. In such a situation, mandatory retirement makes it possible to terminate employment contracts of less productive workers without facing (the risk of) high costs (OECD, 2019[25]; OECD, 2017[29]).

In sum, the existence of mandatory retirement and its specific design in a given country are likely to be at least partly driven by employment and wage regulations. At best, mandatory retirement could be seen as a second-best instrument to deal with difficulties triggered by policies in other areas. The key question is whether the first-best solution would consist in addressing these issues at the source by reforming the measures that directly generate them, e.g. employment and wage regulations, and avoiding mandatory retirement as much as possible. One particular sector where alternative solutions might be more difficult to implement is the public sector. Civil servants tend to have better employment protection, and, as productivity generally is more difficult to assess in the public sector, a transition from seniority- to performance‑based wage setting could prove more challenging.

Mandatory retirement ages in OECD countries

In several OECD countries, employment contracts cannot be terminated as employees reach a certain age. Within Europe, this is the case in Denmark, Estonia, Poland, the Slovak Republic and the United Kingdom. This also applied to Slovenia before mandatory retirement was introduced in December 2020. Outside Europe, this is also the case in Australia, Canada, the United States and New Zealand. These are all countries with significantly lower employment protection against individual dismissals than the OECD average (Annex Figure 1.B.4 below), with the exception of Poland – which is one of the few OECD countries where the termination of the employment contract is required in order to combine work and pension (see Annex 1.A) –, and the Slovak Republic. More OECD countries including Belgium, the Czech Republic and Latvia do not allow for mandatory retirement in the private sector (Annex Figure 1.B.1).

The United States increased the mandatory retirement age from 65 to 70 in 1978 before abolishing it in 1986, except for some occupational groups where there could be valid health and safety concerns (e.g. military personnel, aviation, judiciary, firefighters). Given limited employment protection, the elimination of mandatory retirement had little impact on companies’ willingness to hire older workers (OECD, 2018[30]).47 In Denmark, the mandatory retirement age was abolished in the public sector in 2008 and in the private sector in 2016, although some exceptions for specific occupational groups such as military personnel, police, priests and judges remain (OECD, 2015[31]). Before these recent reforms in Denmark, collective labour agreements and work contracts could contain the obligation to retire at age 70 at a time when the state pension age was 67, lowered to 65 in 2004 (OECD, 2019[2]). In Estonia, the Supreme Court ruled in 2007 that mandatory retirement was unconstitutional.

Among OECD countries, mandatory retirement takes different forms, with varying levels of strictness of employment termination. First, mandatory retirement can apply in the strict sense: the legal obligation to terminate the employment relationship at a certain age. This could be the case for specific occupations where there are health and safety concerns. Even in countries where mandatory retirement is abolished, such as in the United States and Denmark, mandatory retirement ages for safety reasons still apply to for instance military personnel and emergency services (Annex Figure 1.B.1). Furthermore, this is also the case in civil service in many countries (Panel B). In the Czech Republic, Germany, Ireland and Portugal, civil servants cannot work beyond age 70. In Luxembourg, civil servants have to retire at age 68 at the latest, and in Italy they cannot work beyond the statutory pension age of 67. Moreover, Italy is the only country where mandatory retirement applies in the strict sense for private‑sector workers, once they are 70.

Annex Figure 1.B.1. Mandatory retirement ages in OECD countries

Second, as a common form of mandatory retirement, employers are allowed to terminate the employment relationship when employees reach a certain age, but they are not required to do so. In Germany, Luxembourg and the Netherlands, the law allows automatic termination of employment contracts upon reaching the statutory retirement age (Annex Figure 1.B.1, see also Annex Table 1.B.1 with mandatory retirement ages for private‑sector workers at the end of Annex 1.B). Labour protection is removed at the statutory retirement age in Hungary (currently 64 years and 4 months) and Italy (currently 67 years), making it possible for employers to unilaterally terminate the employment contract without severance pay. The form of mandatory retirement introduced in Slovenia in 2020 allows employers to dismiss a worker qualifying for an old-age pension without justification and with 60 days’ notice. Hence, mandatory retirement is already allowed as of age 60 for workers with 40 years of pensionable service without purchase. As statutory retirement ages increase in Germany, Hungary, Italy and the Netherlands, mandatory retirement ages follow this development. In France, Norway and Sweden, labour protection is removed three years after employees reach the statutory retirement age, in Finland four years and three months after the statutory retirement age.48

The following examples provide more details about this second form of mandatory retirement. In the Dutch public and private sector, employers are legally allowed to terminate the employment contract of employees who reach the public legal retirement age, currently at 66 years and 4 months. Mandatory retirement clauses in contracts and collective labour agreements are commonplace, with all public-sector and more than 90% of private‑sector open-ended contracts effectively terminating upon reaching the legal retirement age, after which a new contract can be made with limited protection (OECD, 2014[32]). In the German private sector, mandatory retirement ages are agreed to in collective labour agreements and are typically tied to the statutory retirement age (currently at 65 years and 9 months), but cannot be set below the statutory retirement age unless for health and safety concerns.49 In civil service, employment ends at age 67 in most German states, but extensions are possible until age 70 if they do not conflict with the interests of the civil service (Hack, 2017[33]).

In Sweden, the minimum retirement age in the public earnings-related scheme has been increasing from 61 years in 2019 to 63 years in 2023, with a further increase up to 64 years in 2026. A 2001 law established ‘the right to remain in employment’ until age 67 while before most collective labour agreements included mandatory retirement at age 65. The right was extended to 68 years in January 2020 and is set to increase further to 69 in 2023. Even so, there is no upper limit to delaying retirement if the employer agrees on prolonging employment (OECD, 2019[2]). In the French private sector, only economic redundancies and personal reasons can be valid grounds for a dismissal. However, layoffs do not require any specific motivation after employees reach a certain age. Previously, this was the case once employees were entitled to a full-rate pension and reached age 60. This age limit was increased to 65 in 2003 and further to 70 in 2010 (Rabaté, 2019[26]). By comparison, the full-rate pension is eligible at age 67 (from 2022), or from age 62 with 42 years of insurance period.

Third, mandatory retirement regulations could prohibit employers to dismiss workers while allowing them to change employment conditions unilaterally upon reaching the mandatory retirement age. This is for instance the case in the wage peak system in Korea allowing older workers to continue employment at a lower wage level, or the requirement in Japan to offer a new, typically less generous, employment contract to workers whose employment contracts are automatically terminated when they turn 60 (see above).

In sum, the introduction of mandatory retirement in Slovenia goes against the international trend towards reducing the role of mandatory retirement. As highlighted above, within Europe, Estonia, Poland and the Slovak Republic do not have a mandatory retirement age and were joined by Denmark and the United Kingdom over the last decade. France has substantially increased the mandatory retirement age from age 60 at the turn of the century to age 70 ten years later. Also Finland and Sweden increased their mandatory retirement ages. Elsewhere, mandatory retirement ages have followed the development of the statutory retirement age. Several countries now set the mandatory retirement age well above the statutory retirement age so as to allow people to work longer. In several countries such as Denmark, France and the United Kingdom, allowing people to delay retirement preceded increases in the statutory retirement age. Among the 29 countries for which information was collected, only Germany, Hungary, Italy, Luxembourg and the Netherlands have some form of mandatory retirement in the private sector before the age of 68 years, but not before the statutory retirement age.50 Japan, Korea and Slovenia are the exceptions allowing for mandatory retirement from age 60.

Mandatory retirement and labour market context in Slovenia

This section assesses to what extent the labour market conditions in Slovenia would give support to some motivations for mandatory retirement that have been put forward as described above. More precisely, the importance of seniority in wage setting and the strictness of employment protection are assessed relative to other OECD countries.

Even before introducing mandatory retirement, Slovenia already had the second lowest labour force participation rate among people older than 60 years in the OECD, with only one‑quarter of people aged 60‑64 in the labour market, dropping to 6.2% among the 65‑69 (Annex Figure 1.B.1). In the OECD, on average 54.4% of the 60‑64 participate in the labour market, and 28.8% of the 65‑69. Among the 60‑64, participation rates are also below one‑third in only Austria, Luxembourg and Turkey. In five countries, over two‑thirds of this age group are still in the labour market: Estonia, Iceland, Japan, New Zealand and Sweden.

Annex Figure 1.B.2. Slovenia has a very low labour force participation rate above age 60

Mandatory retirement ages can sometimes be argued for if seniority is an important component in wage setting, as it would result in older workers costing more relative to their productivity levels. In Slovenia, sectoral collective labour agreements in the private sector typically set seniority at a 0.5% increase in wage per year worked; in the public sector this is 0.33% (OECD, 2016[34]). Annex Figure 1.B.3 shows the average predicted wage growth of workers, both public and private, in their fifties when they go from 10 to 20 years of tenure across the OECD. Wage growth driven by seniority is lower in Slovenia (4.2% in total) than in the OECD as a whole (5.9%).

According to these estimates, seniority plays a small role (less than 2%) in six countries, including Estonia and the Slovak Republic, while it is very important (more than 10%) in five countries (Germany, Greece and Turkey in addition to Japan and Korea). When comparing with countries that abolished mandatory retirement, seniority is more important in Slovenia than it is in Australia (1.6%), Denmark (1.7%) and Poland (3.1%), while levels are comparable in New Zealand (4.1%) and well below those in the United Kingdom (6.3%), Canada (6.8%) and the United States (9.6%). Overall, it would be difficult to build a case for mandatory retirement in Slovenia based on the importance of seniority in wage setting.

Annex Figure 1.B.3. Importance of seniority in wage setting is below average in Slovenia

As for the strictness of employment protection for dismissals of workers with a regular contract, Slovenia is just below the OECD average (Annex Figure 1.B.4), with stricter employment protection than most countries that abolished mandatory retirement, except for Poland. This indicator for Slovenia is comparable to that in Germany, and is lower than in Sweden and France, where mandatory retirement is only possible well beyond statutory retirement ages. The Netherlands, where mandatory retirement is possible in the private sector upon reaching the public retirement age, is among the countries with the strictest levels of employment protection. While Slovenia has supplementary employment protection for older workers, this supplementary protection is withdrawn when the worker becomes eligible to receiving an old-age pension: a worker cannot be dismissed for economic reasons from age 58 until qualifying for an old-age pension, or during the last five years before fulfilling the qualifying period (OECD, 2018[35]). Moreover, the protection does not apply if the worker is eligible to unemployment benefits until meeting the conditions for an old-age pension.

Annex Figure 1.B.4. Employment protection against individual dismissals in Slovenia is around the OECD average

Conclusion

There has been a push by EU institutions to restrict mandatory retirement as much as possible, as part of efforts to combat age discrimination, although with weak legal power. The rulings by the Court of Justice of the European Union (CJEU) have tried to circumscribe the conditions under which the practice of mandatory retirement might be considered lawful. According to the CJEU, a mandatory retirement age should be argued for with concrete occupation- or sector-specific evidence, for example related to health and safety concerns when working at an old age, and is only possible if the employees concerned have access to a full pension.

Mandatory retirement practices have been reduced in a number of countries. More than half of OECD countries do not allow for mandatory retirement in the private sector. Only in one in four countries does some form of mandatory retirement exist in the private sector before the age of 68 years. Although mandatory retirement is more common in the public sector, nine countries ban mandatory retirement even for civil servants. This also means, however, that it remains possible to lay off employees once they reach a certain age in many EU countries. Within its 2015 Recommendation that calls for governments to give people better choices and incentives to continue working at an older age and to respond to the challenges of rapid population ageing, the OECD recommends that countries seek to discourage mandatory retirement in close consultation and collaboration with employers’ and workers’ representatives.

Some economic arguments are sometimes put forward to justify mandatory retirement practices. These include the need to offset the impact of seniority in wage‑setting mechanisms and the strictness of employment protection against individual dismissals. Some even refer to the need to free jobs for young generations (“lump of labour” fallacy). None of these arguments is convincing to back a mandatory retirement age in Slovenia more than in other OECD countries.51

The question of mandatory retirement should also be assessed within the current context of the Slovenian labour market. Slovenia has the second lowest labour force participation in the OECD among people older than 60. In line with early exits from the labour market in international comparison, eligibility to a full pension in Slovenia is based on loose conditions, from age 60 with 40 years of insurance. The introduction of mandatory retirement will counteract efforts to make people work longer, while pension spending is projected to increase substantially in Slovenia given fast population ageing. It is difficult to provide solid arguments for mandatory retirement in Slovenia based on international evidence, and in particular to allow mandatory retirement below 68 years, at least in the private sector, and certainly not before the statutory retirement age.

Key findings

More than half of OECD countries do not allow for mandatory retirement in the private sector. Nine OECD countries ban mandatory retirement even for civil servants.
Mandatory retirement practices have been reduced in a number of countries. With the exception of Slovenia since December 2020, no European country allows mandatory retirement before the statutory retirement age, except for specific occupations with health and safety concerns. Only a few European countries have some form of mandatory retirement in the private sector before the age of 68 years.
Mandatory retirement is sometimes advocated if seniority is an important component in wage setting or in the case of strict employment protection against individual dismissals. Slovenia scores below the OECD average in terms of both importance of seniority pay and strictness of employment protection.
Slovenia currently has the second lowest labour market participation rate among people in their 60s in the OECD while pension spending is projected to reach high levels given fast population ageing.
The introduction of mandatory retirement in Slovenia would, if duly implemented, curb efforts to entice people to work longer. It is difficult to provide solid justification based on international evidence for setting a mandatory retirement age below 68 years, at least in the private sector.

	Statutory retirement age	Normal retirement age (when different)	Mandatory retirement age	Strict mandatory retirement age
No mandatory retirement in the private sector
Slovak Republic	62.5
Czech Republic	63.67
Estonia	63.75
Latvia	63.75
Lithuania	64
Poland	65
Canada	65
New Zealand	65
Belgium	65
Spain	65.5	65
Australia	66
Denmark	66
United Kingdom	66
United States	66
Ireland	66
Portugal	66.33	65
Greece	67	62
Mandatory retirement after the statutory retirement age
Finland	63.75		68
Sweden	65		68
France	67	63.5	70
Norway	67		70
Mandatory retirement at the statutory retirement age
Hungary	64.5		64.5
Luxembourg	65	60	65
Germany	65.75	65	65.75
Netherlands	66.33		66.33
Italy	67	62.83	67	70
Mandatory retirement before the statutory retirement age
Korea	62		60
Japan	65		60
Slovenia	65	60	60

Note: The normal retirement age, which is here the age for receiving a full pension without penalty for a worker with a full career from age 20, is shown when different from the statutory retirement age. In the few countries, where the retirement ages still differ between men and women, men’s retirement ages are shown.

Notes

← 1. Also in Poland and the Slovak Republic the Eurostat projections show slightly stronger demographic shift than the UN projections, while both projections show similar results for the Czech Republic and Hungary.

← 2. Purchasing contribution periods is costly. The contribution base is set to the last known individual gross wage uprated with the average pension growth and it cannot be lower than the average wage. The contribution rate is equal to the total of employees’ and employers’ contributions. As a result, purchasing a year of insurance costs at least three monthly average wages. Thus, purchasing insurance periods might be beneficial in quite specific circumstances, e.g. when immediate access to pensions is instrumental for an individual. Among the insured (workers) in 2019, 305 persons, less than 0.1% of workforce, has purchased insurance periods. In 2019, 335 people retired when meeting the eligibility conditions only with the purchased period, which is less than 2% of new pensioners. Based on current knowledge, Luxembourg is the only other OECD country providing such an option.

← 3. This coefficient varied slightly recently: 64.98% in 2018, 65.28% in 2017, 64.66% in 2010; 63.80% in 2006, 62.90% in 1998.

← 4. Minors can claim survivor pensions until their schooling is completed, up to the age of 26 while parents (of the deceased) need to be at least 60 and need to have been maintained by the deceased. For a single recipient, survivor pensions are granted at 70% of the deceased’s pension, which increases up to 100% if four or more family members are entitled to benefits.

← 5. The total contribution rate has remained stable at 24.35% since 1996.

← 6. CEECs underwent substantial economic transformation in the 1990s, defined benefit schemes were transformed into notional defined contribution (NDC) schemes in Latvia and Poland, and into point systems in Estonia, Lithuania and the Slovak Republic. Additionally, Estonia, Hungary, Latvia and Poland directed part of the mandatory PAYGO contributions to funded schemes. However, these reforms have later been reversed in all these countries but Latvia.

← 7. This second option had required reaching ages of 55 and 60 for women and men in 1992, which increased to 58 and 63 by 1997, respectively. The 1999 reform gradually increased this age condition to 61 for women by 2008.

← 8. Additionally, the 1992 law foresaw an option of early retirement with 30 years of insurance at age 50 for women and 35 years of insurance at 55 men with a 1% reduction of pension for each year of insurance mission to the full conditions. These age conditions increased to 53 and 58 for women and men by 1997. This option was removed by the 1999 law. Still, retiring early remained possible as the insurance‑period requirement could have been relaxed through purchasing 5 years insurance under certain conditions.

← 9. The rules for combining work and pensions are discussed in Annex 1.A.

← 10. The only countries in which the share of time spent in retirement is expected to decrease based on current legislation, between cohorts retiring on average today and those entering the labour market today, are Denmark, Estonia, Finland, Italy, Korea, the Netherlands and Turkey. In all other countries that share would increase by 3.1 percentage points on average, representing about 10% of the share spent in retirement.

← 11. It is assumed here that workers enter the labour market at age 22 and have uninterrupted career.

← 12. Additionally, a separate scheme for arduous occupations allows for a bridge retirement from an age that could be as low as 54, depending on occupations, until reaching eligibility conditions to public pensions. This is a funded hybrid scheme with an employer contribution rate of 8% (there is no employee contributions); a floor and a ceiling apply to the benefits calculated following the defined contribution principles. If not used for financing early retirement, the funds on individual accounts are paid out later. The scheme covers around 50 000 workers or 5% of employment. It is discussed more extensively in Chapter 5.

← 13. The share of population with tertiary education is more than twice higher among people aged 25‑34 at 53.8% than among people aged 55‑64 at 19.7%. (Source: OECD Education Database, https://stats.oecd.org/Index.aspx?DataSetCode=EAG_MIGR).

← 14. In addition, one in five were not insured at all, which means that they were neither working, nor receiving unemployment benefits nor benefiting from subsidised pension contributions for long-term unemployed discussed below.

← 15. Data available at: https://www.ess.gov.si/trg_dela/trg_dela_v_stevilkah/registrirana_brezposelnost.

← 16. See Annex 1.B for more details.

← 17. Mandatory retirement rules give employers the option to terminate contracts of older workers at a certain age (OECD, 2017[16]). Laws, collective labour agreements or employment contracts can stipulate the termination of the employment relationship upon the employee reaching a certain age. Countries may facilitate the use of mandatory retirement by including age limits in employment protection legislation or by easing restrictions on layoffs from a certain age.

← 18. As discussed above, in the case of part-time work, the wage used in the reference wage calculations is topped up to the full-time equivalent while the insurance period, and thereby the accrual rate, is prorated based on the hours worked relative to full-time working hours of 40 hours per week.

← 19. Čok, Sambt and Majcen (2010[7]) analyse the impact of prolonging calculation of the reference wage from 18 to 34. For the case of prolonging the calculation of the reference wage to 40 years, those results are extrapolated.

← 20. In Slovenia, the total accrual after a 40‑year career for women is 63.5% which gives before the application of the coefficient (see above in the main text) an average annual accrual of 1.59%. Taking into account the coefficient, this gives 1.026% (= 1.59 * 64.63%).

← 21. In 2017, the Old-age Insurance Commission was created in Austria. The aims of the Commission are to assess the performance of pension system and to recommend adjustments needed to ensure financial sustainability (Ger. Finanzierbarkeit) of pensions, which might affect the effective accrual rate. Still, the government is not bound by the Commission’s recommendations.

← 22. This amounts to frontloading benefits with the 0.75% and 1.6% used as proxies for long-term real-wage gains (OECD, 2019[2]).

← 23. Additionally, indexation cannot be lower than half the inflation rate.

← 24. Theoretical replacement rate in Slovenia includes an additional benefit to all pensioners, called annual allowance that is paid once a year. Health contributions paid for pensioners from the pension budget at 5.96% rate are not part of gross or net pensions.

← 25. In the Czech Republic, having one child allows a woman to retire one year earlier, and two years earlier for two children, three years earlier for three or four children, and four years earlier for five or more children.The reduction is gradually being phased out and will be eliminated for insured women born after 1971. In the Slovak Republic, the statutory retirement age for women having five children in about 2 years lower than for men, but the difference is scheduled to be eliminated by 2024. In Hungary, for women who have raised five or more children, the number of required years of work is reduced by one year for each child, with a maximum reduction of seven years. In Italy, working mothers have the possibility to anticipate retirement by four months for each child, up to a maximum of 12 months.

← 26. In Slovenia, during the maternity leave of up to 105 days the pension is based on the 100% of previous earnings without a ceiling. The parental leave of up to 260 days is equal to 100% of previous earnings up to the ceiling of 2.5 times the average wage. Thus, in total, one year is covered. Additionally, for a parent taking care of a child under the age of 3 or of at least two children under the age of 6, part-time work is topped up, resulting in the pension accrual equivalent to full‑time work.

← 27. Mother is the default parent to benefit from the bonus but it can be changed upon parent’s agreement.

← 28. For rounding purposes in the projections, the figure is based on the age of 64 years.

← 29. Higher contributions, up to EUR 59.97 a month in 2020, are paid for those who became civil service before 2003.

← 30. The OECD pension model assumes a 3% annual real rate of return in funded schemes and 1.25% annual real-wage growth. Based on the total accumulated capital at retirement, i.e. age 62 in Slovenia, a price‑indexed annuity is calculated based on the projected unisex cohort mortality rates.

← 31. Additionally, the government subsidises 50% and 30% of self-employed workers’ pension contribution in the first and the second year of operations. Moreover, while employees earning more than 306% of average wage pay pension contributions without accruing entitlements beyond the ceiling, there is a contribution ceiling for the self-employed at 350% of average wage. This maximum contribution base reduces incentives to underreport income while providing some favourable treatment.

← 32. The monthly minimum wage increased by almost 9% in 2021 while the average wage is expected to increase substantially less.

← 33. Limitations and eligibility criteria for combining work and receiving early pension vary widely across countries (OECD, 2017). In Austria, early retirees can only make up to 11% of average earnings before the early pension is fully withdrawn. In Belgium, by contrast, early retirees can earn up to 50% of average earnings before the pension is gradually reduced. In the Czech Republic, individuals can receive half of the pension whilst working, with the total accrual factor increasing by 1.5 percentage points for each six months of work. France has in place a gradual retirement programme, which applies both an earnings and hours condition: the number of hours worked can be between 40% and 80% of full-time work with the pension reduced proportionally, and the combined income from pension and work income cannot exceed the individual’s last wage prior to early retirement. In Germany, for those with annual earnings above EUR 6 300 (13% of average wage), the full pension is reduced by 40% of the additional earnings. In Greece, early retirees can have a combined pension and employment income of 40% of average earnings; thereafter pensions are reduced by 60% against employment income. Likewise in Japan, for ages 60‑64, when the total income of monthly pension and standard remuneration exceed JPY 280 000 (two‑thirds of average earnings), pension benefits start to be reduced.

← 34. Dual status refers to claiming pension while working on a regular employment contract or as a self-employed or as a farmer. When working based on civil law or under special arrangements of temporary and occasional work for pensioners, receiving 100% of pension can be combined with work. In those cases, no pension contributions are paid and pension rights do not accrue.

← 35. Unless working 25% or less of full-time working hours, in which case, the full pension is paid, no additional entitlements accrue and no contributions are paid. The half-time threshold leads to an additional strange outcome: someone working 15 hours a week receives lower total benefits than a person working 20 hours a week.

← 36. In the case of combining pension with part-time work, a retiree may alternatively apply for adjusting pension to additional accrual without recalculating pension fully. Still, this option would be less beneficial than full recalculation in most cases.

← 37. See for example: OECD (2013), OECD Employment Outlook 2013, OECD Publishing http://dx.doi.org/10.1787/empl_outlook-2013-en; Gruber, Jonathan and David A. Wise, eds. 2010. Social Security Programs and Retirement around the World: The Relationship to Youth Employment. Chicago, IL and London: The University of Chicago Press; Alicia Munnell & April Wu, 2013. “Do Older Workers Squeeze Out Younger Workers?,” Discussion Papers 13‑011, Stanford Institute for Economic Policy Research; Borsch-Supan, Axel and Murray, Alan, 2014. “Note on the Myth that Older Workers Delaying Retirement Creates Unemployment for the Young,” MEA discussion paper series 201 424, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

← 38. This number is based on the cohort mortality for the cohort born in 1960 in Slovenia, and standard assumptions of Pensions at a Glance: annual real wage growth of 1.25% and the real discount rate of 2%.

← 39. Accrual rates are 1.36% for years after the first 15 years and 1.97% for first 15 years. The numbers account for the 2019 reform which has equalised the accrual rates between men and women through increasing those of men, to by fully effective by 2025.

← 40. Individuals currently combining work and pensions for one year have only 40% of their pension for the first year, which is offset by slightly higher pensions for the remaining years.

← 41. On top of the increase stemming from the valorisation of past wages and before accruing additional entitlements.

← 42. When combined with work, pensions should just increase based on additional accruals without any bonus.

← 43. AGE Platform Europe is an advocacy organisation for people aged 50+ within the European Union. It is a network of organisations representing people aged 50+ in Europe.

← 44. It is worth noting that the Directive states that it ‘shall be without prejudice to national provisions laying down retirement ages’. However, the Court of Justice of the European Union (CJEU) interpreted this as referring to setting eligibility ages for pension entitlements, which, as a matter of social policy, is a national responsibility. Mandatory retirement at the eligibility age, on the other hand, was deemed a matter of termination of employment contracts, and thus within the scope of the Directive (Oliveira, 2016[21]).

← 45. The CJEU also includes some most arguable factors such as that elevated levels of occupational or sectoral (youth) unemployment could constitute a justification on the basis of intergenerational solidarity. Pursuing a more balanced age distribution within the sector or organisation might also be considered a valid argument.

← 46. The Korean Tripartite Commission contains representatives of labour unions, employers and the Government.

← 47. However, there is some evidence that the introduction of the 1986 legislation against age discrimination did reduce older jobseekers’ chances to find a job (Lahey, 2010[37]).

← 48. Moreover, in France, civil servants’ employment terminates in principle at age 67 although in some cases an exception could be asked for up to three years. Hence, they can work until age 70 where mandatory retirement applies in the strict sense (OECD, 2014[38]).

← 49. Since 2014, it has been possible to remain in employment after reaching the mandatory retirement age on temporary contracts if both employer and employee agree to extend the employment relationship.

← 50. There are two instances where mandatory retirement was re‑introduced, both in private and public sectors. Ireland has a mandatory retirement age of 70 for people who entered civil service since 2013, while there is no mandatory retirement age for people who entered civil service between 2004 and 2012. In the Netherlands, civil servants’ contracts are automatically terminated upon reaching the public retirement age. Since 2008, civil servants could demand unlimited one‑year contract extensions that could only be refused in case of ‘physical or mental barriers to continued work performance’ (Oude Mulders, 2019[36]), but this policy was abolished again in 2019.

← 51. Moreover, even if some credit would be given to the lump of labour idea, Slovenia had relatively low levels of youth unemployment before the COVID‑19 crisis.

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