The evolution of retirement

SSRN Electronic Journal, 2018

Pensions may be provided for in a modern society by several methods, viz., voluntary individual savings, mandatory fully funded occupational pension systems, and mandatory social security financed by pay-as-you-go. The specific mixture of the three systems we will call the pension composition. We assume that individual workers decide about their own individual savings, that the fully funded occupational system is decided upon by the age cohort of the median worker and that social security is decided upon by the median voter. For a given demography and interest rate the joint result of those decisions is a Paretoequilibrium. Nowadays most of capital supply stems from individual and institutionalised pension savings. For ease of exposition we will assume that individual and collective pension savings are the only source of capital supply. When capital supply equals demand from industry there is equilibrium on the capital market with a corresponding equilibrium interest rate. In this paper we assume a demography with hundred age brackets and we investigate how changes in the birth and survival rates affect the pension composition and the capital market equilibrium. Our conclusion is that the demographic effects are considerable not only for the resulting pension composition, but also for macroeconomic variables as the wage rate, the interest rate and the capital-income ratio. It follows that the pension composition in general and social security in particular is determined by the demography and cannot be used as long-term political instrument. We find that this is relevant for the present century, where birth and mortality rates in most western countries are steeply declining.

2011

Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a formal model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy. We demonstrate how higher life expectancy and human capital endowment facilitate the rise of net replacement rate. We provide and examine an empirical model of old-age expenditure in a panel of 33 countries in the period 1998–2008. Our results indicate that increases in total fertility rate and effective retirement age would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, it would endanger long-term sustainability of public finance by imposing additional pressure on deficit and public debt.

1998

This is one of a series of analytic papers that supported the OECD's horizontal work on ageing. The results of the entire project are summarised in Maintaining Prosperity in an Ageing Society , OECD 1998. Chapter II and IV of Maintaining Prosperity-on domestic and international macroeconomic issues and on retirement income -drew on this working paper. The paper is also available as Economics Department Working Paper No. 200, at . The effect of pension systems on public and private saving is important -savings are a crucial link between decisions today and living standards tomorrow. This paper, following a brief overview of pension systems in some OECD countries, reviews the empirical literature. Two important questions are: do unfunded public pension schemes reduce national saving? Do tax-favoured private saving schemes increase national saving? Quantitative estimates are highly uncertain, but the answers appear to be, "yes, by up 30 per cent of the funding gap"; and "yes, but often not by very much when the fiscal effects are considered." . The authors are Richard Kohl and Paul O'Brien of the OECD's Economics Department.

2002

This mix of state and private pension provision in the United Kingdom provides a rare degree of variation in pension incentives for retirement. Using a sample of individuals from the UK Retirement Survey, the paper models the probability of retirement in terms of the incentives underlying the individual's pension plan as well as other socio-economic factors. It follows an option value approach and allows a separate role for pension wealth, for spouse's economic characteristics and for demographic characteristics.

Pension systems are a major part of the political economy of current societies – much beyond providing old-age income security. The well-known demographics of population aging as well as globalization today challenge their at several levels: in terms of attitudes towards public spending on pensions or towards the state's responsibility in this matter, of support for pension policy alternatives, and of preferred individual age of retirement. Results show that large majorities across all age groups are in favour of more government spending on pensions. There is a substantial amount of 'involuntary retirement', meaning that people would have preferred to work longer than they actually did, as well as a somewhat lower amount of 'involuntary work', but the preferred ages are everywhere below 65, and in some countries still below 60. Finally, the paper examines the policies of raising the retirement age adopted during the last two decades. What has especially been lacking in these policies is a consideration of socially differentiated longevity. PATTERNS Retirement is today a central part of the social policy agenda of most countries across the developed (and increasingly the developing) world 1. The high levels of pension expenditures experienced in the past few years, and the even higher ones projected for the coming decades, have now become a key issue of concern. At stake are the basic options not only for the growth and social cohesion. Pension systems thus need to be viewed within a broader framework. Their major purpose is to provide income security to retirees. In addition to such redistribution (or individual income smoothing) over the life course, they may also aim at redistribution across population

We explore the direct impact of changes in the tax treatment of pensions using the SWITCH tax-benefit model. The model simulates the tax liabilities and benefit entitlements of a nationally representative sample of households -the data are drawn from the CSO's Survey on Income and Living Conditions (EU SILC) for 2005. A weighting scheme is used to adjust the data to represent the demographic situation in 2030 and 2050. All of the model results are based on the technical assumption of no change in behaviour. The fact that social welfare entitlements are incorporated in the model means that it is possible to analyse the direct impact of restrictions on income tax relief, coupled with an increase in social welfare pensions. These results could equally be interpreted in terms of changes in taxes helping to sustain existing levels of payment. Before analysing potential policy changes, we examine the potential impact of trends towards increasing coverage in occupational and private pensions, and in qualification rates for the contributory State Pension. Occupational/private pension coverage among current pensioners is about 30 per cent, but stands at about 60 per cent for the over 30s. This difference reflects the fact that the rate of pension coverage has been rising over time. If this higher rate of coverage is sustained then future pensioner populations will be more likely to have an entitlement to a private or occupational pension than the current cohort of pensioners. What implications would this have for the "at risk of poverty" measure for future pensioners? We estimate that this factor could reduce the "at risk of poverty" measure by about one-third -both in terms of the familiar head count ratio, but also in terms of broader measures taking account of the depth of poverty. In a similar fashion, we analyse the impact of increased rates of qualification for the contributory State Pension. This factor could lead to a reduction in the head count of poverty of about one-fifth, and would also help to reduce the depth of poverty. Debate about the appropriate tax base has, in the past, often been characterised as a contest between an income base and an expenditure base. More recent reviews of this area conclude that the optimal tax system contains some form of taxation of capital income, and a more productive question is how to tax capital income, given that earnings are subject to tax. Perhaps the strongest rationale for the pension-related deduction is that it serves as a mechanism for reducing net public sector spending, while avoiding the political economy difficulties of reducing wage rates explicitly. However, there are serious disadvantages associated with achieving the cost reduction in this fashion, which involves concentrating the burden of adjustment on those currently in employment, while they are in employment. An explicit wage rate reduction would also reduce the incomes of current and future pensioners. The pension-related deduction does not do this. In this way, it increases the replacement rates for public sector workers facing retirement decisions -tending to reduce labour supply, in a similar way to an income tax increase. Moreover, the progressive structure of the levy may damage labour market efficiency in the public sector. Broader tax/welfare measures to achieve distributional and anti-poverty goals may be more appropriate. Our review of the international scene is necessarily selective -our aim is to highlight findings of particular relevance to the scope of this study. We begin, in Section 2.2, by looking at the UK Pensions Commission's appraisal of the UK system and options for its reform (UK Pensions 2005). Section 2.3 then reviews some key papers on the nature and strength of the responses to financial incentives for retirement savings in the UK and in the US, where extensive research on these issues has been conducted. Of course, many factors other than financial incentives influence retirement savings decisions. There has been a growing literature on how behavioural factors influence retirement savings, and how changes in the way savings and pension plans are structured can influence the degree to which they are taken up by different groups. Such studies are reviewed in Section 2.4. The main implications for Ireland are drawn together in the final section. In this chapter we examine how the trade-offs facing policy are influenced by: 4.1

1984

Pensions influence retirement decisions. The analysis provides a framework for assessing the phenomenon. The qualitative features of most defined benefit pension plans in the United States, as the first section demonstrates, can be used to induce optimal retirement choices. Pensions are viewed as a form of forced savings; their purpose is to enable the worker to "commit himself" by making it in his own self-interest to retire at an appropriate age. The remaining sections examine the use of pensions in populations that are heterogeneous with respect to such features as disutility of work or expected lifespan.

2009

We fully display a cohort model of an economy with an aging population, taking into account varying family size, habit formation, inheritance and credit constraints. Filling the model with numbers, we are able to compare different pension reforms: 1. the base run, 2. the reduced accrual rates, 3. replacing wage indexation with price indexation and 4. raised retirement age. Whether the policy changes are anticipated or not, the private reactions widely differ.

Journal of demographic economics, 2021

economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

Using pseudo-panel microdata we show that pension generosity affects early retirement decisions. The changes in the average replacement rate and decreases in wealth accrual between 1967 and 2004 have caused an increase in early retirement probabilities from 16% to 63%.