Individual Retirement Decisions Research Articles

Retirement Behaviour in Austria: Effects of Incentives on Old‐Age Labour Supply

AbstractWe provide an extensive analysis of retirement behaviour in Austria with a special focus on the role of incentives delivered by the tax and benefit system in determining individual retirement decisions. A comprehensive microsimulation model of the Austrian pension system is applied to calculate retirement benefit entitlements and forward‐looking incentive measures (social security wealth, accrual rate, peak and option values) on an individual basis. We use the calculated incentive measures as the main explanatory variables in probit models to explain retirement decisions. We base our microsimulation and estimations on an extensive administrative Austrian data set. These data contain information on more than 300,000 new retirees from the period 2001–11. We provide robust evidence that incentive measures are well suited to explaining individual retirement decisions.

Influencia del mercado de trabajo en las pensiones de México y España a partir de la tasa interna de rendimiento

The aim of this article is to analyze the financial solvency of PAYG pension systems in Spain and Mexico, incorporating labor market behavior for each case. The methodology employed is based on the Internal Rate of Return and the Cost of Unitary Pension, which allow us to observe the financial actuary imbalance between contributions and future benefits of contributors to the system. The results show that as unemployment increases in their working lives, the profitability offered by the system outweighs the long-term economic growth, in the case of Spain. Whereas in the case of Mexico, informality increases the insolvency detected in the system. The greatest limitation has been the search and processing of information for comparative analysis. The main contribution of the analysis is the incorporation of labor market transition probabilities into the calculation of pensions. It is concluded that labor market behavior directly affects the solvency of pension systems and, therefore, the individual retirement decisions.

Endogenous Retirement Behavior of Heterogeneous Households Under Pension Reforms

We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems.

Trends and Determinants of Work-Retirement Transitions under Changing Institutional Conditions: Germany, England and Japan compared

AbstractMany governments world-wide are promoting longer working life due to the social and economic repercussions of demographic change. However, not all workers are equally able to extend their employment careers. Thus, while national policies raise the overall level of labour market participation, they might create new social and labour market inequalities. This paper explores how institutional differences in the United Kingdom, Germany and Japan affect individual retirement decisions on the aggregate level, and variations in individuals’ degree of choice within and across countries. We investigate which groups of workers are disproportionately at risk of being ‘pushed’ out of employment, and how such inequalities have changed over time. We use comparable national longitudinal survey datasets focusing on the older population in England, Germany and Japan. Results point to cross-national differences in retirement transitions. Retirement transitions in Germany have occurred at an earlier age than in England and Japan. In Japan, the incidence of involuntary retirement is the lowest, reflecting an institutional context prescribing that employers provide employment until pension age, while Germany and England display substantial proportions of involuntary exits triggered by organisational-level redundancies, persistent early retirement plans or individual ill-health.

Labor Force Transitions at Older Ages: The Roles of Work Environment and Personality

Besides compensation and financial incentives, several other work-related factors may affect individual retirement decisions. Specifically, job characteristics such as autonomy, skill variety, task significance and difficulty, stress and physical demands, peer pressure and relations with co-workers, play a crucial role in determining psychological commitment to work at older ages. While financial preparedness for retirement and health shocks are often cited as main predictors of the choice to exit the labor force, there exists relatively little research documenting the extent to which the work environment itself and its interaction with economic variables influence retirement decisions. We document that job characteristics are associated with labor force transitions at older ages, in particular transitions to retirement and part-time employment. Additionally, we show that while personality traits do not directly drive labor force transitions, the effect of job characteristics on labor supply outcomes varies with the “intensity” of personality traits. We also document that job characteristics themselves are strongly related to personality traits. This suggests that, depending on their personality, individuals may select into specific jobs, whose characteristics ultimately shape their retirement paths.

FLEXIBLE RETIREMENT

AbstractFlexible retirement – that is, the opportunity to choose one's own personal retirement age – is a hedge against pension risk and provides insurance to workers facing health or productivity shocks. Flexible retirement and flexible pension schemes are in practice closely linked because of imperfect capital markets and institutional restrictions. I discuss three necessary conditions to provide insurance through flexible retirement. First, it should be possible to adjust the pension starting date at limited cost. This condition is gradually being fulfilled, as many countries are moving toward more actuarially neutral pension schemes. Second, individuals should be willing to adjust their labor supply in case of a wealth shock. This condition seems largely fulfilled, although the available empirical evidence suggests that the ‘standard retirement age’ is at least as important as the income effect. Third, the labor market should be able to deal with flexible individual retirement decisions. This condition is gaining importance, but has not yet received much attention in the literature. Institutions often hamper employment past the ‘standard retirement age’. Moreover, the hiring rates of older workers are low and their unemployment duration is high. Institutional reforms facilitating flexible retirement opportunities are desirable from an insurance perspective.

"Trends and determinants of work-retirement transitions in Japan, Germany and England"

Since the mid-1990s, national policy makers have attempted to discourage early retirement and to promote longer working life through changes in labor market and welfare regulations. However, comparative research suggests that not all workers are equally able to prolong their employment careers. Thus, while it is likely that national policies raise the overall level of labor market participation, national 'active aging' measures might create new social and labor market inequalities. This paper explores how institutional differences in three welfare states (England, Germany and Japan) affect individual retirement decisions on the aggregate level, and variations in individuals´ degree of choice within and across these countries. The aim is therefore to investigate which groups of older workers in the three countries are disproportionately at risk of being 'pushed' out of employment before reaching formal national retirement ages, and how the nature of these inequalities has changed over time. Drawing on evidence from comparable surveys for the three countries (ELSA; SHARE and JSTAR) and using descriptive and multivariate logistic regression analyses, the paper reconstructs the timing of employment-retirement transitions of older workers as well as their concrete reasoning for doing so in order to establish the degree of voluntariness in retirement transitions.

The timing of retirement — New evidence from Swiss female workers

We investigate the responsiveness of individual retirement decisions to changes in financial incentives. A reform increased women's normal retirement age (NRA) in two steps from age 62 to age 63 first and then to age 64. At the same time retirement at the previous NRA became possible at a benefit discount. Since the reform affected specific birth cohorts we can identify causal effects. We find strong and robust behavioral effects of changes in financial retirement incentives. A permanent reduction of retirement benefits by 3.4% induces a decline in the age-specific annual retirement probability by over 50%. The response to changes in financial retirement benefits varies with educational background: those with low education respond most strongly to an increase in the price of leisure.

The Timing of Retirement - New Evidence from Swiss Female Workers

We investigate the responsiveness of individual retirement decisions to changes in financial incentives. A reform increased women's normal retirement age (NRA) in two steps from age 62 to age 63 first and then to age 64. At the same time retirement at the previous NRA became possible at a benefit discount. Since the reform affected specific birth cohorts we can identify causal effects. We find strong and robust behavioral effects of changes in financial retirement incentives. A permanent reduction of retirement benefits by 3.4 percent induces a decline in the age-specific annual retirement probability by over 50 percent. The response to changes in financial retirement benefits varies with educational background: those with low education respond most strongly to an increase in the price of leisure.

Spousal influence on the retirement decisions of single-earner and dual-earner couples

Abstract This article explores the influence of the spouse or partner on individual retirement decisions. Event history analysis is used to study the effects of age, education, health, income, the activity status of the partner and care-taking needs of children or dependents on retirement decisions, controlling for several personal characteristics and country differences. Given the family context, a division was made between single-earner and dual-earner couples. Data were drawn from the European Community Household Panel (ECHP) which presents longitudinal data for the period 1994–2001. Although individual determinants still dominate the retirement decisions of both single-earner and dual-earner couples, the results show that the family context in which labour-market decisions are made is important to understand the retirement process. An age gap between the spouses decreases the hazard of retirement. Higher levels of education also decrease the odds on retirement (or early retirement) for dual-earner households. The ECHP data moreover confirm the importance of subjective and objective health measures on the retirement decisions of spouses. With regard to the number of working hours, male dual-earners who work full-time stay in the labour market longer than do men who work part-time. Finally, care activities have a positive effect on the retirement decision of both men and women in single-earner and dual-earner households.

An empirical analysis of retirement behaviour in Spain: partial versus full retirement

Abstract In several developed countries, the ageing process of the population may pose fiscal risks to the PAYG systems of public pensions. This paper studies the determinants of two forms of accessing retirement in Spain, either partial or full retirement. Our goal is to identify if social security legislation influences the choice between these two alternative paths. Using a newly released data set we estimate a multinomial logit duration model including different measures capturing the economic incentives embedded in the social security system. Our results show that social security incentives determine individual retirement decisions. Besides, partial retirement legislation modifies the selection of retirement routes and affects the age of retirement moving it to an earlier date.

Should You Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds

We use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Our analysis suggests the existence of an acquiescence bias, meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect. We hardly find evidence for adverse selection effects in the data. Single men, for example, whose money's worth of an annuity is considerably below the corresponding value of married men, are not likely to choose the capital option.

The Economics of Pensions and Variable Retirement Schemes.

PART ONE: SOCIAL SECURITY REFORM: A SURVEY: Social Security Policy in International Perspective Public Pensions: Economic Approaches PART TWO: INDIVIDUAL RETIREMENT DECISIONS: Determinants of the Lifetime Labour Supply A Basic Analytical Framework Marginal Fairness and Pareto-Efficiency PART THREE: HETEROGENEOUS POPULATIONS AND EFFICIENT RETIREMENT RULES: Variable Retirement Schemes and Individual Choices The Common Contribution Rate Adverse Selection and Benefit Rules Summary and Conclusions.

Passing the Torch: The Influence of Economic Incentives on Work and Retirement

This book summarizes research on individual retirement decisions and aggregate retirement trends. It also serves as an excellent reference source on the economics of retirement.

Passing the Torch: The Influence of Economic Incentives on Work and Retirement.

This book summarizes research on individual retirement decisions and aggregate retirement trends. It also serves as an excellent reference source on the economics of retirement.

Passing the torch: the influence of economic incentives on work and retirement

This book summarizes research on individual retirement decisions and aggregate retirement trends. It also serves as an excellent reference source on the economics of retirement.

Social security, liquidity, and early retirement

This paper investigates the effect of Social Security on retirement decisions. It argues that it is important to take realistic account of how recipients evaluate potential benefit flows. The paper presents a simple retirement model in which liquidity constraints prompt individuals to use higher than market discount rates in evaluating future pension benefits. As a consequence, even an apparently actuarially fair early retirement benefit could (on average) discourage continued work. Using data on individual retirement decisions, I find support for the argument that this phenomenon contributes to some of the observed increase in early retirement.

Decision and Adaptation

Review of the literature shows that while women's adaptation to retirement has been closely studied, little is known of the female retirement decision. No gender differences in adaptation have been demonstrated. Hampered by poor data sets and design, and responsive to the prejudicial assumption that women had low work commitment, early adaptation studies found that women workers adjusted poorly to retirement, often more poorly than men. However, these results have not been confirmed. Recent research shows that most women adjust well, and no consistent gender differences have been found. Gender differences are much more likely to be observed in the decision to retire. Analysis of the timing of retirement among married couples indicates that the characteristics of the spouse influence individual retirement decisions. The effects of these characteristics differ in strength and direction, depending on gender. Future research on female retirement should focus on decision making in the marital unit.

‘Double dipping’: the combined effects of social security and civil service pensions on employee retirement

We consider the retirement behavior of civilian employees of the United States government. Unlike previous studies, this investigation is based upon a data set containing fairly complete and accurate information about the Social Security and employer-provided pensions for which employees are (or ultimately will be) eligible. These data permit us to specify the financial aspects of individual retirement decisions with a reasonable degree of precision. A large fraction of civil service pensioners is eligible to receive Social Security benefits because a part of their working careers was spent in Social-Security-covered employment. The prevalence of pension coverage among government employees has raised serious equity questions about the treatment of civil servants by Social Security, and these questions have led to various suggestions for pension reform. Partly, the reform proposals have been put forward due to the perceived unfairness of double dipping which arises from the pension coverage of government employees. Our analysis finds: (1) Both the amount of a Federal pension entitlement and the expected wait until the pension commences affect the timing of retirement from the Federal service. (2) The rate of anticipated wage growth significantly affects individual decisions to remain in Federal employment. (3) Workers who are eligible to ultimately receive Social Security in some cases show a different pattern of retirement than do workers not vested in Social Security. However, our analysis does not reveal any massive shift of Federal workers into Social-Security-covered employment in order to benefit from the tilt in the Social Security formula.

Social Security and the Retirement Decision

The effect of Social Security and private pensions on individual retirement decisions is modeled, relaxing in turn three commonly maintained assumptions—perfect capital markets, actuarial fairness, and certain lifetimes—which together imply that there is no effect. In each case, raising the contribution level can cause systematic changes (of either sign in general) in individual retirement decisions. For Social Security, the effects associated with forced saving and deviations from actuarial fairness probably tend to advance retirement. But those effects that arise solely from the insurance aspect of Social Security and private pensions are ambiguous in sign, owing to the presence of a substitution effect that tends to delay retirement because the insurance benefits can be fully realized only by working longer.