TABLE OF CONTENTS
Acknowledgments
Introduction
DOI: 10.7208/chicago/9780226262604.003.0001
[Disability Insurance;Retirement;Incentives;Social Security;Labor Supply;Older Workers]
This is the sixth phase of a project on Social Security Programs and Retirement Around the World. The first phase described the retirement incentives in plan provisions and the strong relationship across countries between incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase demonstrated the fiscal implications of extending labor force participation on net program costs—reducing benefit payments and increasing tax revenues. The fourth phase analyzed the relationship between the labor force participation of older and younger persons in twelve countries and found no evidence that increasing employment of older persons will reduce employment opportunities or increase unemployment for youth. The fifth phase on "Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms" sets the stage for this volume, which focuses on DI programs while extending the methodology to study retirement behavior to focus on the effects of DI programs. This volume asks: given health status, to what extent are differences in labor force participation across countries determined by the provisions of disability insurance programs? (pages 1 - 44)
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Disability Insurance Incentives and the Retirement Decision: Evidence from the U.S.
DOI: 10.7208/chicago/9780226262604.003.0002
[Disability insurance;Retirement;Incentives]
A rising share of older workers in the United States makes use of the Disability Insurance (DI) program in their transition to retirement, with about one in seven men and one in nine women between the ages of 60 and 64 now enrolled in the program. This study explores how financial incentives from Social Security and DI affect retirement decisions, using an option value approach. We find that financial incentives have a significant effect on retirement, particularly for those who are in poor health or who have low education, who may be more actively considering retirement at younger ages. Simulations suggest that increasing the stringency of the screening process for DI would increase the expected working life of DI applicants. (pages 45 - 80)
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Effect of Pensions and Disability Benefits on Retirement in the UK
DOI: 10.7208/chicago/9780226262604.003.0003
[Pension incentives;Retirement;Disability;Labor supply]
This paper examines to what extent differences in employment rates across those in better and worse health in the UK can be explained by the availability of publicly-funded disability insurance and the financial incentives provided by other retirement income schemes. Using an option value approach, we find that individuals' labor force participation is affected by financial incentives. A one standard deviation change in the option value is estimated to reduce the likelihood of an individual leaving the labor market in the next year by between 2.7 and 3.1 percentage points, relative to an average exit probability of 9.4%. This suggests the variation in financial incentives across different individuals could explain a significant proportion of retirements. However, we find no evidence that individuals with different levels of health respond to our measure of financial incentives differently. We conclude that it would require a major change in disability insurance program stringency to generate an economically significant change in overall employment rates of older workers in the UK. The level of disability benefits they might receive is low relative to the amount they could earn and, therefore, large changes in rates of eligibility would not induce large changes in overall employment rates. (pages 81 - 136)
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Option Value of Disability Insurance in Canada
DOI: 10.7208/chicago/9780226262604.003.0004
[Canada;Retirement;Disability;Public pensions;Elderly;Labor supply]
We investigate the importance of the financial incentives for work and retirement embedded in Canada’s public retirement and disability benefit systems. We extend previous research on incentives for retirement by incorporating the structure of incentives in the Canada and Quebec Pension Plan disability benefits, and through careful attention to the impact of self-assessed health status. We find the financial incentives embedded in the public pension system have a significant and substantial effect on the likelihood of entering retirement, but the impact of disability benefits is overshadowed by regular retirement benefits. We also find that the response is driven by those with lower self-assessed health. (pages 137 - 178)
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Health Status, Disability, and Retirement Incentives in Belgium
DOI: 10.7208/chicago/9780226262604.003.0005
[Social security;Disability;Pensions;Retirement;Option value;Older Workers;Health status]
Many Belgians retire well before the statutory retirement age. Numerous exit routes from the labor force can be identified: old-age pensions, conventional early retirement, disability insurance, and unemployment insurance are the most prominent ones. We analyze the retirement decision of Belgian workers adopting an option value framework, and we pay special attention to the role of health status, in particular the potential link between health status, disability insurance and retirement for contractual wage earners aged 50 to 64. We estimate profit models of retirement using data from the Survey of Health, Ageing and Retirement in Europe (SHARE). The results show that health and incentives matter in the decision to exit from the labor market. Based on these results, we simulate the effect of potential reforms on retirement. (pages 179 - 210)
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Health, Disability Insurance and Labor Force Exit of Older Workers in the Netherlands
DOI: 10.7208/chicago/9780226262604.003.0006
[Labor force participation;Disability Insurance;Health]
In this chapter we examine to what extent the exit probability from the labor force can be explained by the provisions of the Disability Insurance (DI) program in the Netherlands. We disentangle DI eligibility from DI generosity effects. For this purpose we make use of three waves of the Dutch branch of the Survey of Health, Ageing, and Retirement in Europe, conducted in 2004, 2007 and 2011. We find no discernible impact of the level of disability benefits on the exit from employment, but restricting access to the DI scheme does affect labor force exit and increases, on average, the years people remain in employment until the age of 65. These findings suggest that if policymakers are interested in reducing the number of DI recipients, an alternative to reducing DI benefits for those who qualify for DI could be stricter medical screening of individuals who apply for DI. (pages 211 - 250)
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Retirement, Early Retirement and Disability: Explaining Labor Force Participation after 55 in France
DOI: 10.7208/chicago/9780226262604.003.0007
[Health;Disability;Retirement]
We analyze the influence of health and financial incentives on the retirement behavior of older workers in France, building upon the Stock and Wise (1990) option value approach. The model accounts for three main retirement routes: normal retirement, disability insurance (DI), and unemployment/preretirement pathways, and is estimated with a combination of microeconomic datasets that include the French data of the European SHARE survey. The estimates confirm that a decrease in the generosity of the pension and DI schemes induces people to stay longer in the labor market, and that people with better health tend to retire later. We present extreme situations simulating what an individual's retirement behavior would have been if only one retirement route had existed and in the absence of constraints on work capabilities. We show that average years of work between 55 and 64 are nearly 14% greater when regular retirement incentives are applied to the whole population than when it is DI rules that are systematically applied. (pages 251 - 284)
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Health, Financial Incentives, and Early Retirement: Micro-simulation Evidence for Germany
DOI: 10.7208/chicago/9780226262604.003.0008
[Early Retirement;Disability Pensions;Micro-Simulation;Germany]
About 20% of German workers retire on disability pensions. Disability pensions provide fairly generous benefits for those who are not already age-eligible for an old-age pension and who are deemed unable to work for health reasons. In this paper, we use two sets of individual survey data to study the role of health and financial incentives in early retirement decisions in Germany, in particular disability benefit uptake. We show that financial incentives to retire do affect sick individuals at least as much as healthy individuals. Based on 25 years of individual survey data and empirical models of retirement behavior, we then simulate changes in the generosity of disability pensions to understand how these changes would affect retirement behavior. Our results show that making the disability benefit award process more stringent without closing other early retirement routes would not greatly increase labor force participation in old age. (pages 285 - 330)
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Health, Disability Insurance and Retirement in Denmark
DOI: 10.7208/chicago/9780226262604.003.0009
[Disability Insurance;Health;Education;Retirement;Option Value;Denmark]
There are large differences in labor force participation rates by health status. We examine to what extent these differences are determined by the provisions of Disability Insurance and other pension programs. Using administrative data for Denmark we find that those in worse health and with less schooling are more likely to receive DI. The gradient of DI participation across health quintiles is almost twice as steep as for schooling - moving from having no high school diploma to college completion. Using an option value model that accounts for different pathways to retirement, applied to a period spanning a major pension reform, we find that pension program incentives in general are important determinants of retirement age. Individuals in poor health and with low schooling are significantly more responsive to economic incentives than those who are in better health and with more schooling. Similar gradients in outcomes and behavior by health and schooling partially reflects the less educated having poorer health on average, but also that the less educated have worse job prospects and higher replacement rates due to a progressive formula for DI and other pension benefits. (pages 331 - 368)
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Pathways to Retirement and the Role of Financial Incentives in Sweden
DOI: 10.7208/chicago/9780226262604.003.0010
[Disability Insurance;option value;labor market exit;labor supply]
We study how economic incentives affect the labor force exit of individuals through different income security programs, old-age pensions as well as income taxes in Sweden. We use the option value for staying in the labor force as a measure of economic incentives and estimate an econometric model for the choice of leaving the labor market. We consider two different pathways to retirement: the old-age pension path and the social insurance path. The latter includes Unemployment Insurance (UI), Sickness Insurance (SI) and Disability Insurance (DI), but we focus on the incentives provided by the DI program, which is the most important labor force exit path before age 65. By simulating the effect of different probabilities of receiving DI we show how changes in the stringency of DI admittance affect labor supply of older workers through economic incentives. (pages 369 - 410)
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Health Status, Disability Insurance and Incentives to Exit the Labor Force in Italy: Evidence from SHARE
DOI: 10.7208/chicago/9780226262604.003.0011
[pensions;social security;disability;early retirement;unemployment;labor force participation]
This chapter analyzes the retirement behavior of Italian employees by considering different pathways to retirement such as old age, early retirement and disability insurance. In particular, we focus on the role played by health conditions and socio-economic factors beyond and above the financial incentives associated to each pathway. These incentives are measured by the option value of working an extra year vis-à-vis leaving the labor force through one of the alternative routes. The Italian experience has been characterized for many years by a relevant early retirement option, but a renewed interest by workers for disability pensions could stem from the recent pension reforms, which introduced tighter eligibility criteria for early exits. The financial incentives of the different pathways are used in a dynamic way, controlling for health conditions measured by an overall health index. The econometric estimates are based on the SHARE data: we find that the recent reforms have induced some delay in the retirement decision and that health has important effects on the decision of working in old age. (pages 411 - 454)
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Financial Incentives, Health and Retirement in Spain
DOI: 10.7208/chicago/9780226262604.003.0012
[financial incentives;health;retirement;disability insurance]
In this work we take advantage of the detailed health information available in the Survey of Health and Retirement in Europe (SHARE) to explore the link between health, financial incentives and retirement. With this purpose, we construct a health index and classify individuals into health quintiles and use this information to assess the extent to which differences in health are translated into differences in the responsiveness to changes in financial incentives. In addition, we construct a single option value measure by compiling the information on financial incentives from the disability, the old-age and the unemployment systems in order to consider the aggregate incentives from all the social security schemes used as pathways into retirement among individuals aged 50 to 64 in Spain.Our results show that individuals in the worse health quintiles are, indeed, the more responsive to financial incentives as they prove to be less likely to retire when incentives to continue working increase. We further perform a series of simulations to assess the expected changes in retirement choices of older individuals when some of the policy parameters are modified. (pages 455 - 496)
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Option Value of Work, Health Status, and Retirement Decisions in Japan: Evidence from the Japanese Study on Aging and Retirement (JSTAR)
DOI: 10.7208/chicago/9780226262604.003.0013
[Option value model;JSTAR;Retirement;Disability program;Counterfactual simulation;Japan]
This study examines the factors that affect the retirement decisions of the middle-aged and elderly in Japan, focusing especially on their earnings, public pension benefits, and health status. Using two-year panel data from the JSTAR and applying the option value (OV) model proposed by Stock and Wise (1990a, 1990b), we found that the probability of retirement has a negative and significant correlation with the OV of work, and that correlation does not depend on the health status. Our counterfactual simulation based on the OV model shows that if the probability of being enrolled in the disability program were zero, the average years of work when individuals are in their 50s and 60s would increase. However, it should be emphasized that in Japan, where being enrolled in the disability program is unlikely to make one a candidate for the retirement path, the result of this simulation does not indicate that satisfying the eligibility criteria for disability pension receipts will more stringently increase the labor supplied by the middle-aged and elderly. (pages 497 - 536)
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Contributors
Author Index
Subject Index
