Beware of the employer: Financial incentives for employees may fail to prolong old-age employment

Abstract

We show that a stepwise increase in the normal retirement age (NRA) by up to five years and the introduction of actuarial pension deductions for retirement before NRA was ineffective in prolonging employment of older men after early retirement age. We argue that the ineffectiveness of the German pension reform resulted from a change in employer behavior that was mainly induced by a recession during the implementation period of the pension reform. Employers seem to have nudged their employees to use a bridge option that was introduced with the pension reform (partial retirement) or a traditional bridge option (unemployment). These bridge options allowed an early retirement age (ERA) of 60 instead of the only alternative early retirement option with an ERA of 63. Bridge options therefore offered employers an opportunity to terminate employment considerably earlier and exert more influence over the employment exit age. We argue that without a change in employer behavior, neither using one of the bridge options nor the earlier employment exit would have been utility maximizing for the individuals affected by the reform.