Effects of Pensions on Labor Markets and Retirement

Why People Retire The purpose of this analysis is to identify the role of pensions in affecting individuals' retirement decisions. At the outset, it is important to identify why retirement occurs; seven factors play a role in our models. They Working Paper 970. New York: Columbia University Press. this volume. and normal retirement. Journal of Gerontology. this volume. strictions on recipients. American Economic Review (May).

RePEc: Research Papers in Economics, 1983

Old age income security is one of society's most pressing concerns. A decline in family support of the aged, major increases in the length of retirement, and social security's long-term financial difficulty are all reasons for the growing anxiety. Consideration of current and past socioeconomic data provides a solid basis for this anxiety. Between 1950 and 1970 the fraction of the aged living with their children declined from 31 to 9 percent.' Today fewer than 3 percent of elderly households receive income from their children.z These contributions represent less than 1 percent of the income of the e l d e r l ~. ~ Life expectancy for males at age 25 is 46.9 additional years, up from 44.6 years in 1 950.4 Despite this increase, the average number of years worked by 25-year-old males has declined by 3.13 years.5 Together, these changes have almost doubled the expected duration of retirement and other nonworking periods for males from 5.93 years to 11.47 years. The ratio of nonworking to working years for males is now .32, more than twice the 1950 value. For females, growth in the expected work span, associated with dramatic postwar increases in labor force participation, has exceeded growth in the expected life span by 3.26 years. However, if one measures female work years on a male-equivalent earnings basis, the average young adult's expected nonworking period has increased by 3.60 years.6According to this measure, 25-year-olds can now expect to spend 1.2 years out of the work force for every year they spend in the work force.' Difficulties in financing an extended retirement without major family support have been eased considerably by sizable increases in real social security benefits. These benefits now represent the major source of income for 54 percent of the aged.8 However, the continued reliance on social security benefits as the primary source of old age income support is becoming increasingly unlikely. Demographic changes continue to place the Social Security System in a long-term financial crisis. Changes in fertility rates are expected to lower the ratio of social security contributors to beneficiaries from the current value of 3.2 to 1.5 by the year 2040.9The 1983 social security legislation notwithstanding, unless additional measures are enacted shortly, social security tax rates, including health insurance tax rates, could rise as high as 25 percent by the early part of the next century to meet projected benefit payments.lo The rapid growth of private, state, and local pensions in the 1950% 1960s, and 1970s represents a natural response to changes in family support of the elderly, an expansion of the retirement period, and uncertainty concerning the amount of retirement income one can expect from social security. Special tax incentives, a recognition of the advantages of group insurance policies, and the use of fringe benefits to avoid periodic government wage controls are important additional explanations of pension growth. The American pension system is, however, more than simply the inevitable product of changing social, demographic, and economic conditions. Pensions themselves are playing an increasingly important role in shaping social conditions and altering economic behavior. Pensions and the Economics of Aging 1 1.3 The Emerging Role of Pensions in the American Economy: Postwar Patterns of Growth Private, state, and local pensions now cover over 45.28 percent of the U.S. labor force. In 1950 the figure was 19.93 percent. Coverage of private wage and salary workers more

Industrial and Labor Relations Review, 1991

Research for research support. We also wish to thank Steven Woodbury, Robert Spiegelman, Allan Hunt, and an anonymous reviewer for very helpful comments. We are particularly grateful to the vice-president of the large corporation who provided us with data on a confidential basis. Gary Heaton and Jagadeesh Gokhale provided outstanding research assistance. vii CONTENTS 1 Introduction The Trend Toward Ezr ly Retirement 5 Pension Back loading 9

1987

The provisions of the pension plan in a large corporation are described in detail. The implications of the provisions are indicated by pension accrual profiles. These profiles are set forth, together with standard age-earnings and Social Security accrual profiles, in the form of lifetime budget constraints. The plan provided very strong incentives to retire beginning at age 55. After age 65, negative pension and negative Social Security accruals effectively impose almost a 100 percent tax rate on wage earnings for many employees of the firm. Departure rates from the firm are compared with economic incentives inherent in the plan provisions. The inducements in the plan provisions to retire early have had a very substantial effect on departure rates from the firm. Over 50 percent of those employed by the firm at age 50 leave before 60 and 90 percent before age 65. The jumps in departure rates at specific ages coincide precisely with the discontinuities and kink points in the worker compensation profiles that result from the pension plan provisions together with wage earnings profiles and Social Security accrual.

1985

1996

The Quarterly Journal of Economics, 1979

Excerpt] While it is obvious that the costs of term life insurance vary directly with age, it is less obvious how employers' contributions to pension funds, which comprise a major share of nonwage compensation, vary. As such, we focus in this paper on the most common variant of pension plans and demonstrate how an employer's cost of fully funding a plan varies with the age and service characteristics of his work force. This cost, as a percent of annual salary, is seen to increase with employees' ages and, in some cases, years of service. This variation has important implications for the level and shape of life-cycle earnings profiles, for labor turnover, and for the likely impact of pension reform legislation, such as the Employees Retirement Income Security Act of 1974 (ERISA), on the well-being of workers. These implications are discussed in this paper.

ILR Review

In this article, the authors assess the impact on male employees’ labor market outcomes of firms offering a special form of phased retirement. The goal of the program is to smooth the transition from work to retirement and to decrease the costs of public pension and unemployment insurance schemes by increasing the employment of elderly workers. Using a unique linked employer-employee data set, the authors examine whether male employees spend more time in employment and less time in unemployment or inactivity after the introduction of the program. Results suggest that phased retirement options offered by firms can help to reduce some of the public costs of low labor force attachment of elderly workers, mainly by reducing exits through unemployment and by increasing employment and earnings. Under relatively good labor market conditions, they may also encourage a small share of workers to exit the labor market earlier.

2003

Defined benefit pension plans have become considerably less common since the early 1980s, while defined contribution plans have spread. Previous research showed that defined benefit plans, with sharp incentives encouraging retirement after a certain point, contributed to the striking postwar decline in American retirement ages. In this paper we find that the absence of age-related incentives in defined contribution plans leads workers to retire almost two years later on average, compared to workers with defined benefit plans. Thus, the evolution of pension structure can help explain recent increases in employment among people in their 60s, after decades of decline.

The paper develops a framework to analyze the distortions, and associated economic costs, that DB pension systems can impose on labor markets by influencing two types of decisions: (i) whether to retire and become inactive; and (ii) whether to supply labor in the public, formal private, or informal sectors. The analysis is divided into three parts. The first part develops a framework to analyze retirement decisions taking into account trade-offs between consumption and leisure based on unknown distributions of the parameters that characterize individuals preferences and their levels of risk aversion. The second part develops a model that projects the skills composition of the labor force, and using standard wages equations, the level of human capital. The model is then used to assess how changes in retirement probabilities, by age and gender, affect the accumulation of human capital and economic growth. The third part of the analysis proposes a methodology to analyze the distortions that pension systems impose on implicit rates of return on investments in education for individuals following different career paths and supplying their skills in different sectors of the economy and the potential negative effects on labor mobility. The applications of these three models are illustrated in the context of the Moroccan pensions system.

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.

We estimate a causal model of the treatment effects of pension plans on the labor supply of older workers, using data from the Health and Retirement Study. Econometrically, we use a propensity score matching estimator to estimate the population average treatment effect, the population average treatment effect on the treated and the population average treated effect on the non treated; where treatment in our analysis refers to having a defined benefit plan and having a defined contribution plan. We find no difference between the labor market behavior of older workers with DC pensions and older workers with only social security. Our approach avoids having to make strong assumptions about the functional form of the utility function, and makes the identifying variation from pension incentives clearer, while addressing endogeneity and self-selection in pensions and retirement.

SCEPA Working Papers, 2011

Employers are the heart of the American pension system and yet they are not well understood by policy makers despite the great influence of Congress on pension design through both regulation and favorable tax treatment of retirement accounts. Employer contributions to employee ...

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...