Taxation of early retirement windows and delaying retirement: The French experience

Abstract

This paper investigates the effect of the 2003 French pension reform on hiring, firing and employment rates among older workers. This reform increased the mandatory retirement age and simultaneously it set a tax levied on early retirement windows paid by firms to their older workers, to encourage them to leave their job early. We use a matching model with endogenous job destruction extended to account for a mandatory retirement age and we calibrate the model with data drawn from the French Labor Force Surveys for the years 2002 and 2003. We show that in the case of a high tax rate, delaying retirement raises job separation rates, which partially offsets its positive effect on job finding rates. Consequently, the combination of an increase in the retirement age and a taxation on early retirement windows may have negative effects on the employment rate among older workers. ► A study of the effects of delaying retirement with age-dependent firing costs. ► A taxation of early retirement windows introduced by the French 2003 reform. ► A new effect of delaying retirement that raises separations: the impatience effect. ► The impatience effect may offset the standard effect of delaying retirement. ► A critical value of the tax rate, above which the impatience effect dominates. ► The higher the persistence of shocks, the lower the critical value of the tax rate.