Managing an ageing workforce
An older population presents many challenges to labour markets, government tax and spending and the wider economy of countries around the world, but it also has a strong impact on businesses. On the one hand, older employees can bring many benefits to companies as they are often more experienced and tend remain in positions longer than their younger counterparts. On the other, older employees cost more - as a result of their experience but also in terms of health care and social security, and many companies may have to invest in strategies to ensure they get the best from their aging employees. In light of this, employers need to adapt to the new reality and introduce the necessary changes to accommodate older workers in the workplace. How companies address these challenges can have profound implications on their ability to succeed in the future economy.
Labour lawyers from member firms of Ius Laboris, a HR and employment law firm alliance, provide guidance on employment legislation for aging employees and what companies need to know in Brazil, Argentina, Mexico and Chile, including key legislative developments.
According to a study by the Brazilian Institute of Geography and Statistics (IBGE), the life expectancy of the Brazilian population increased 30.3 years between 1940 and 2016 while the birth rate declined 31% between 2000 and 2015. It is no wonder that the increase in the number of elderly people in Brazil has drawn the attention and efforts of the government to resume the debate and proposition to reform the country’s social security programme. There is now a legislative bill pending approval by Congress, providing for, among other initiatives, an increase in the minimum age for retirement and the standardisation of rights and benefits including special pension rules for public servants.
The fact is that the public pension scheme scarcely provides enough to support the cost of living in big cities. Consequently, Brazilian workers often postpone their retirement. In Brazil,
retirement, which is understood as the granting of the pension scheme, does not lead to the automatic termination of the employment agreement in effect and few employees apply for a termination of the contract (severance pay is also a disincentive). The attempt to extend the employment contract length in such cases is also because it is very difficult for senior workers to find new jobs and to re-enter the labour market as employees or self-employed. The Brazilian Federal Constitution and the law n. 10,741 provides for general protection and equal rights for the elderly, including protection against discrimination, however, there is no specific regulation or official guidelines on what this constitutes and it is up to the companies to have their own policies.
While there certainly is a need for more guidance on the topic, there are several bills currently being debated in Congress that aim to address some of the gaps. Bill n. 142/2017 provides for the possibility of executing a special employment agreement with individuals over 60 with a limit of 4 hours of work per day and the payment of a reduced Length-of-Service Guarantee Fund (FGTS) rate of 2% (the FGTS provides account-based cash benefits to employees on termination of employment for any reason, including retirement). Another bill (n. 688/1999) would grant a tax incentive for employers who hire elderly employees. The government is also looking at the possibility of implementing the so called RETA Regime (Special Retirement Work Regime) in which retirees may work as independent contractors without receiving certain labour benefits such as holiday and sick pay, and whereby companies are not required to contribute to social security. It is unpredictable, however, when and if Congress will make a decision on these bills anytime soon.
For the time being, due to the lack of effective statutory protection, many collective bargaining agreements provide for the next best thing: protection against involuntary dismissal (without cause) of individuals who are close to the statutory retirement age (usually 24 months) and who have worked with the company for a certain time period (usually 5 years).
Pension benefits in Argentina are mainly managed by the state. The country’s current retirement system has evolved from the early professional pension funds of 1904. Over the years, the pension funds were extended to the majority of activities in the country until they covered all the existing formal workforce, by the middle of the twentieth century.
Although, it was initially conceived as a self-capitalisation system, the national retirement system was leveraged to become a pay-as-you-go system (‘PAYG’) for retirement. The system is based on the 'redistribution principle' by which all formal employees and employers make corresponding contributions that consist of a percentage of the employee’s salary (the contribution rate payable by the employer is equal to 23/27/32% of the employee´s salary, depending on the main activity of the employer and the employee is also required to pay a contribution equal to 17% of their salary).
The system is thought to be supported by the active working population. The prospective active/passive ratio was 3 formal active workers to 1 passive worker. At present, this equation is largely out of range. Nowadays the retirement system spend reaches 13% of the GDP. However, only 45% of it is supported by legal contributions while the remaining 55% comes from other fiscal resources. In addition, the increase in life expectancy and the steady growth of informal employment due to economical fluctuations challenges a system that seems no longer attainable.
Under these circumstances, Congress has recently enacted Act 27.426, which introduces changes in the requirements applicable to mandatory retirement. The new regulation maintains the existing conditions to apply to mandatory retirement pursuant to Section 19, Act 24.241 (male employees must be 65 years, female employees must be 60 years old – though they can opt to retire at 65 - plus 30 years of effective services with corresponding contributions). Under the previous legislation, the employer was entitled to terminate employment contracts of those who met the conditions to apply for mandatory retirement. However, the new law now means that the employee is allowed to continue working until the age of 70. Consequently, the employer will no longer be allowed to terminate the employment without the payment of statutory severances of an employee who, otherwise, could apply for mandatory retirement.
The growth of the population altogether with mismanagement of the public income has proven to be significant enough to put the retirement system at risk. Nevertheless, the burden has been placed on the employers forced to delay the renewal of the workforce and deal with the natural contingencies of employment relationships.
Undoubtedly, changes to the national retirement system were necessary, however, challenges have arisen with the growth of social tax evasion, which should be addressed via a thorough and accurate approach, that also involves proper policies to address the the already limited labour market also affected by modern technologies.
Chile is another Latin American country which has experienced a significant ageing of its population, not only because birth rates have been decreasing but also because life expectancy has been increasing.
Many studies suggest that employees’ monthly pensions savings during their working life has not been sufficient enough to cover their outgoings when they actually reach retirement in Chile. This lack of savings shows that effective retirement planning is a significant obstacle for many. Employees, therefore, often need to work beyond the statutory retirement age, which is 65 for male employees and 60 for females.
There are, however, a number of issues associated with working beyond retirement age in Chile. For example, the current minimum wage for those over 65 is 25% lower than for employees between 18 and 65 and research has shown that the workforce of people aged 65 or over has increased to 21%. There are no specific labour regulations in place for such individuals, and there is also a bill of law currently been discussed in Congress, which discourages employers to hire such individuals, due to implications concerning potential compensation claims in case of death. Employing older workers is clearly very complicated given the fact that the risk of death for older people is higher.
Taking into account the above, on September 1, 2017, the government signed the “Inter-American Convention for the Protection of Human Rights of the Elderly” which establishes, the obligation to take measures to cease any labour discrimination against older people and thus be entitled to the same protection and labour benefits as other employees. A bill of law entitled the “Retirement Reform” is also currently being discussed by Congress, which establishes an additional 5% to be paid by employers to employees’ pension funds, of which 3% will go directly into the employee’s personal account while the remaining 2% will be distributed into a common fund for all employees. In addition, the reform seeks to have: (i) an intergenerational contribution, which basically means that younger employees will also contribute to increase the retirement funds for those currently in retirement, (ii) an intragenerational contribution, which implies that those employees who earn more contribute to those who earn less, and (iii) a compensatory bonus for women, which implies that a male employee and a female employee who retire at the age of 65 will have the same savings, and will receive the same pension. The aim behind this compensatory bonus is to enable women to retire when they reach 65.
Employment and retirement bills of law for older workers are being debated in Chile predominantly to regulate and protect them but also to bring the country’s legislation more in line with the reality of an ageing population and their specific needs.
Mexico is going through an unprecedented demographic shift which has led to a rapid increase in the aging population over the last decades. From 1.8 million people aged 65 and older in 1970, the population within this age range increased to 4.7 million in 2000 and totaled 8.5 million in 2017 (which was equivalent to approximately 6% of the total population at that time). By 2050, the number of people who are 65 or older is expected to reach 28.7 million, which will represent just over 20% of the total population. Estimates show that 45.8% of the population aged 65 and over lived in poverty in 2017, and that 50% of the elderly within this segment of the population were still working, even after reaching the usual retirement ages.
As a result of this demographic shift, many believe that a major crisis is brewing in Mexico’s pension system, endangering the economic security of many workers who are close to retirement age. The controversy is also supported by the fact that the Mexican Social Security Institute (IMSS) debt is equivalent to 56% of the country's gross domestic product according to announcement from IMSS itself.
If measures are not taken to alleviate the financial problems of the IMSS, the quality of health care, and access to it, would be drastically reduced. The main challenge lies in "formalising" the employment status of the overall population and ensuring that employer and employee contributions for retirement and social security become universal. According to IMSS, in the past two years, only 18 million formally-employed workers were registered. However, according to the National Institute for Statistics and Geography, during this period there were more than 50 million economically active people in Mexico. The real problem, therefore, is that the system doesn't cover those “informal” workers, and that many people contribute to the system for only brief periods of time i.e. when they are formally employed.
To target the increasing number of people reaching retirement age without social security cover (i.e. mostly those who were part of the informal sector during most of their working lives) the first noncontributory pension programme was launched in Mexico City back in 2001 which provided a cash subsidy and facilitated access to social security to elderly people reaching retirement age without social security coverage, then several states throughout the country followed suit with similar programmes.
In alignment with Mexico’s more recent National Development Plan, a so-called Pension Programme for the Elderly (PPE) was also created in 2014 as a safety net to reduce the vulnerability of the population aged 65 without access to social security by providing its enrollees with a cash subsidy every two months, and by facilitating access to social security.
In addition to the cash subsidies, the PPE programme provides assistance for matters such as opening a bank account and beneficiaries participate in informative sessions on health issues and receive assistance that enables them to access services and support from institutions. This aid applies only to those who receive electronic bank transfers and is aimed at promoting greater social inclusion. It also offers protection to its members by promoting access to healthcare services.
Although noncontributory pension programmes such as PPE have proven effective in different countries as a strategy to reduce poverty rates in the older populations without social security coverage or employer-based pensions, their greatest limitation is that they are subject to government funding availability. In the case of Mexico, the expected future financial burden associated with the recent expansion of the PPE in terms of geographical coverage and number of beneficiaries represent the programme’s main challenge. This is because the number of eligible beneficiaries will continue to rise in the upcoming years, as a result of Mexico’s demographic transition. Another limitation of the PPE includes the possibility of resource “leakages” due to the enrollment of individuals who already benefit from other programmes that target the elderly.