An Evaluation of the Life-cycle Effects of Minimum Pensions on Retirement Behavior

Abstract

In this paper we explore the distortions that minimum pensions generate on retirement behavior. This is done with the help of a stylized life-cycle model, which provides a very convenient analytical characterization of the optimality conditions, and a very easy qualitative exploration of the impact of pension rules on optimal behavior. In this context we show that a standard life cycle model, that does not consider minimum pensions, is unable to fit the data. This anomaly is resolved once the minimum pension is taken into account. In order to quantitatively assess the contribution of minimum pensions to early retirement patterns we, firstly, recover the preference parameters through a structural econometric estimation; and, secondly, we simulate the change in the retirement distribution induced by the minimum pension. We found that 3 out of 4 workers retire before 65 under the minimum pension, while this ratio is 3 in 5 without it.