Financial incentives to postpone retirement

Abstract

This article analyses whether financial incentives to delay retirement affect the employment and wages of older workers, not just their retirement behavior. We focus on the outcomes of France’s 2003 reform that offered pension bonus to older workers who postponed their retirement until the legal age. An equilibrium search model is built in which both employment and wage are endogenous, allowing us to analyze the role of both labor supply and demand in the retirement decision. Simulations of the model show that some firms choose to post higher wages to induce their workers to work longer. Thanks to a higher retention, firms save recruitment and training costs. Finally, demand-side considerations can attenuate the impacts of financial incentives that cause wage increases and too few new jobs.