Micro-Modeling of Retirement Behavior in Italy

Abstract

This paper presents an empirical analysis of the retirement decisions of Italian workers. We emphasize the role played by dynamic incentives, built in the social security system, which encourage (or discourage) retirement. The basic idea is that, at any given age and based on the available information, workers compare the expected present value of two alternatives, retiring today and working one more year, and then choose the one which is best. A key role in this kind of comparisons is played by social security wealth, whose level and whose changes on a-year-to-year basis and over the worker’s residual life reflect the institutional features of the social security system. The various incentive measures that we consider differ in the precise weight given to the social security wealth that workers accrue as they continue to work. Notice, however, that our model does not pretend to be a structural representation of the retirement process, as a worker’s decision is modeled here following a simple reduced form approach, where the incentive measures enter as predictors of a worker’s binary choice, in addition to standard variables such as sex, age and other background variables. We use a longitudinal sample of Italian workers drawn from the social security archive containing the information on private sector employees.