Pension incentives and the pattern of early retirement

This paper studies the determinants of the retirement transitions of Europeans and focuses on the impact of social security systems on retirement behavior. The analysis uses the first eight waves (1994-2001) of the European Community Household Panel. Based on these survey data, option values – which express, for each retirement age, the trade-off between retiring now and keeping the option open for some later retirement date – are constructed for each sampled individual in three countries: Finland, Belgium and Germany. The overall results of the duration and probit models show that the option value, well-being at work and health all have a significant impact on retirement decisions irrespective of gender. The analysis shows that policies to raise marginal incentives and, hence, option values are effective, especially in Finland. The incentives have the highest impact on the early retirement stage. In Germany and Belgium we see spikes in retirement at age 60 or 65, whereas the retire...

2007

We describe the trajectory of pension reform in the United Kingdom, which has focussed on keeping the cost of public pension programmes down during a period of steady population ageing whilst attempting to maintain an adequate minimum level of income security for low income households in retirement. Instruments for achieving these aims have been to target public benefits on low income households, permitting individuals to opt out of the second tier of the public programme into private retirement accounts, and the use of tax incentives to encourage additional private retirement saving. Frequent reforms to the pension programme raise the question of whether households can make reasonable private retirement saving provision in the light of growing complexity and potential shortcomings in individual decision-making. This paper sheds some light on these issues.

is a Lecturer in Accounting and Finance at Plymouth Business School. Sue has an interest in contemporary development in the world of pensions and also has undertaken research in the areas of stock market effi ciency and corporate investment and fi nancing decisions.

1983

This paper addresses two questions: (1) Are older persons' retirement ages significantly affected by the opportunities for income from earnings, private pensions, and Social Security and for leisure at alternative retirement ages?; and (2) How large are the estimated responses? Our approach to modeling the retirement problem is a forward-looking one, in which the explanatory variables include present discounted values of expected lifetime income from earnings, private pensions, and Social Security at all future retirement ages. Such data have been constructed using a unique archive on 390 workers covered by a large union pension plan. A previous paper (Fields and Mitchell, 1982) used these data to show that retirement ages are significantly associated with the present discounted value of income at age 60, and with the gain in income from deferring retirement. The current paper develops two different qualitative choice models of the retirement decision. We find: retirement ages do indeed respond significantly to future income and leisure opportunities; an ordered logit model is more suited to the data than is a multinomial logit model; and the estimated responses to changes in future income opportunities differ across model specifications, where the preferred ordered logit model exhibits larger estimated responses.

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

Journal of Social Policy, 2007

2005

ENEPRI Research Reports are designed to make the results of research undertaken within the framework of the European Network of Economic Policy Research Institutes (ENEPRI) publicly available. This paper was prepared when the author was participating in REVISER-a Research Training Network on Health, Ageing and Retirement-which has received financing from the European Commission under the 5 th Research Framework Programme (contract no. HPRN-CT-2002-00330). Its findings and conclusions should be attributed to the author/s and not to ENEPRI or any of its member institutions.

This paper provides a detailed analysis of individuals in households in England aged between 50 and the State Pension Age in terms of their private pension arrangements and current non-pension assets alongside their expectations of future economic circumstances. Our descriptive findings include that members of defined benefit pensions have higher average levels of current earnings than members of defined contribution pensions and that median expected private pension income in retirement is highest for current members of defined benefit schemes. We find that on average those who have, or have had, a private pension have greater non-pension wealth than those who have never had a private pension. In terms of expectations of the future we find that it is those who have the fewest assets who have the least attachment to the labour market and are far less likely to expect any inheritance. Hence we conclude that inequalities in different dimensions of retirement resources tend to reinforce themselves as opposed to offset each other.

2002

The retirement behavior of Pennsylvania public school teachers is modeled using a choice framework that emphasizes both pecuniary and non-pecuniary factors. We find each to have large and statistically significant effects on the decision to retire. The present value of inflation adjusted pension benefits is found to be an important determinant of retirement. A $1,000 (or .4 percent) increase in the value of pension benefits is estimated to increase the probability of retirement by .029 to .078 percentage points; this implies an elasticity of retirement with respect to the present value of real pensions of between 2.1 to 2.9. Estimated pension elasticities for female teachers are somewhat lower than for male teachers. A $1,000 increase in current salary is found to reduce the mean probability of retirement by .1 percentage points, implying an elasticity of –1.4. Student achievement (but not student poverty) is also significantly related to teacher retirement; a one standard deviation...

2005

This paper develops a general equilibrium simulation model of a heterogeneous population in which both consumption/saving and labour/leisure choices are endogenous. The authors use it to explore the effects of the different state benefit systems on the labour supply of old and older workers in Denmark, Germany and the UK. In broad terms, they find that differences in labour force participation can be accounted for by the differences in benefit structures. These conclusions are not altered when they allow for the effects of poor health at different ages. The UK system is found to be preferable by young persons while the German arrangement is preferred by old and older people (who make up the majority in the simulated population).