ABOUT THIS BOOK
A global analysis of the effects of social security reforms on the retirement incentives and labor force trends of older workers.
Employment among older men and women has increased dramatically in recent years, reversing a downward trend in the closing decades of the twentieth century. Social Security Programs and Retirement around the World examines how changing retirement incentives have reshaped labor force participation trends among older workers. The chapters feature country-specific analyses for Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, the United Kingdom, and the United States. They find that while there is significant heterogeneity across countries, the reforms of recent decades have generally reduced the implicit tax on work at older ages. These changes correlate positively with labor force participation. The studies exploit the variation in the timing and extent of reforms of retirement incentives and employ microeconometric methods to investigate whether this correlation reflects a causal relationship. Policy changes appear to have contributed to rising labor force activity, but other factors like the role of women in the labor force, improved health, and changes in private pensions likely also play important roles.
TABLE OF CONTENTS
Introduction
DOI: 10.7208/chicago/9780226836362.003.0001
[benefits;pension;incentives;reforms;ITAX;implicit tax;social security]
This tenth phase of the International Social Security (ISS) Project examines rising labor force participation at older ages. The chapters describe the social security systems and reforms of these systems in 12 developed countries, calculate the implicit tax on working longer using microdata on workers’ earnings histories, estimate regression models relating retirement incentives to actual retirement behavior, and conduct simulations to quantify the effects of policy changes on retirement outcomes. The social security program reforms in these countries substantially reduced the implicit tax on work at older ages, and the stronger financial incentives to work are positively correlated with labor force participation at older ages. In this volume, we exploit the time-series and cross-national variation in the timing and extent of reforms of retirement incentives and employ micro-econometric methods in order to study whether the correlation between financial incentives and work at older ages is causal.
Chapter 1. Trends in Social Security Incentives in Belgium
DOI: 10.7208/chicago/9780226836362.003.0002
[benefits;ITAX;implicit tax;incentives;Belgium;pension;social security;working longer;labor force participation]
In Belgium, a series of social security reforms have been implemented over the years with the overarching goal of increasing labor force participation through better work incentives. Using individual-level administrative data, the chapter studies the impact of those incentive-based reforms on observed changes in older workers’ employment patterns. We investigate how individual social security incentives and their changes over time explain the retirement decision at the micro level. We systematically calculate indicators of benefit entitlement and retirement incentive measures and relate them to individual labor force participation. Using microestimation techniques, we find that more generous retirement provision contributes to earlier retirement. Counterfactual reform simulations show strongly incentivizing effects at lower ages and more mixed results at higher ages—particularly for men.
Chapter 2. Retirement Decisions and Retirement Incentives: New Evidence from Canada
DOI: 10.7208/chicago/9780226836362.003.0003
[benefits;ITAX;implicit tax;incentives;Canada;pension;social insurance;working longer;labor force participation]
The labor force participation rates of older men and women in Canada have increased steadily since the mid-1990s. Recent work shows that the incentives to retire early have diminished over time. However, the means testing of benefits designed to boost the retirement incomes of low-income seniors continues to create a substantial implicit tax on work at older ages for those facing the phase-out range of the means-tested benefits. This study uses microdata to estimate the behavioral effects of the retirement incentives embodied in Canada’s social security system. We primarily use data from the Longitudinal Administrative Database (LAD), which provides a large sample of older individuals and detailed information about their earnings histories since 1982, other sources of income, and family characteristics. We use the available information to construct measures of individuals’ implicit tax on continued work at each age based on provisions of the Canada and Quebec Pension Plans (C/QPP), Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Allowances, taking into account provincial and federal income taxation.
Chapter 3. The Role of Social Security Reforms in Explaining Changing Retirement Behavior in Denmark 1980–2016
DOI: 10.7208/chicago/9780226836362.003.0004
[Post-Employment Wage;benefits;ITAX;implicit tax;incentives;Denmark;pension;social insurance;reforms;labor force participation]
Like other OECD countries, Denmark has witnessed a remarkable turnaround in the labor force participation of older people over the last half-century. Starting from the mid-1990s, however, a series of pension reforms were enacted, tightening eligibility requirements, closing off certain early retirement pathways, and shortening the duration of the Post-Employment Wage. These reforms increased the incentives for later labor force exit. We examine whether changing incentives in the pension system caused the rising labor force participation of older adults in Denmark since the turn of the century. We do so by applying a benefits calculator we developed in previous work to microdata on a representative sample. We compute an after-tax retirement income stream for each possible pathway out of the labor market for each retirement age and construct incentive measures inherent in the pension system, such as social security wealth and its annual accrual relative to earnings. We then regress labor force exit on these incentive measures, separately by gender and marital status, and generate predicted and counterfactual retirement probabilities that we compare to the observed probabilities to infer the causal effect of incentives for explaining changing retirement ages.
Chapter 4. Financial Incentives and Labor Force Participation of Older Workers: Evidence from France
DOI: 10.7208/chicago/9780226836362.003.0005
[schemes;ITAX;implicit tax;incentives;France;pension;retirement;labor force participation]
This paper estimates the impact of financial incentives on the decision to retire in France for cohorts of men retiring between 1994 and 2012. During these two decades, a number of pension reforms took place, all aiming to achieve financial balance in the context of increasing life expectancy. These reforms strengthened incentives to retire later, either by offering increased pension benefits for later retirement—becoming close to actuarial fairness—or by increasing early and normal retirement ages. This paper aims to assess how much these financial incentives and age references did contribute to the recent increase in employment rates of older workers. Our results show that financial incentives do matter for recent cohorts, and our estimates suggest that they matter more than what was measured in previous studies.
Chapter 5. Retirement Decisions in Germany: Micro-Modelling
DOI: 10.7208/chicago/9780226836362.003.0006
[benefits;ITAX;implicit tax;incentives;Germany;pension;retirement;labor force participation]
Employment in older ages has declined for a long time in Germany, even for women, but this has reversed since about 2000. Earlier work suggests that much of the trend reversal of older men’s labor force participation (LFP) could be explained by changes in Germany’s public pension rules, particularly by the phasing in of actuarial adjustments for early retirement. Regarding women’s LFP, the picture was more complex. This suggests that the secular change of women’s role in society was the main driver of the steadily increasing LFP among the younger German women, while there was a policy-related trend reversal among older women. However, these conclusions were based on aggregate data and stylized model households. The bivariate correlations do not control for the many other potential explanatory factors and the heterogeneity in the population. This requires a much more elaborate multivariate analysis, which is the aim of the current paper. We use microdata and structural policy changes since 1980 as instruments to draw causal inference on the effect of public pension rules on retirement and labor force participation choices at older ages.
Chapter 6. The Effect of Retirement Incentives: Micro-Evidence for Italy
DOI: 10.7208/chicago/9780226836362.003.0007
[benefits;ITAX;implicit tax;incentives;Italy;pension;reforms;working longer;labor force participation]
This chapter discusses the evidence at the individual level of the retirement decision in Italy, also in relation to pension reforms. By exploiting different sets of micro-data, it computes retirement financial incentive measures in the public pension system, based on the real individuals working careers and estimates the impact of these on the decision to retire/continue to work. We model individual behavior and compute predictions to retire by age and year. In addition we perform simulations in order to assess what would have been the probability to retire, have the reforms not been adopted.
Chapter 7. Relationship between Social Security Programs and Elderly Employment in Japan
DOI: 10.7208/chicago/9780226836362.003.0008
[benefits;ITAX;implicit tax;incentives;Japan;pension;reforms;employment;labor force participation]
This study examines how elderly employment is associated with social security programs and how it responds to recent reforms in Japan. To this end, we employed a rich longitudinal dataset of middle-aged and older individuals collected between 2005 and 2018. By incorporating various factors related to social security incentives into a single index of implicit tax (ITAX), we confirmed that the index successfully captured the incentives and their changes incorporated in recent social security reforms. We further estimated the association of ITAX with an individual’s decisions concerning retirement and pension benefit claims. Lastly, we conducted counterfactual simulations to assess the effect of recent social security forms on retirement based on the estimated regression parameters. The results showed that a higher ITAX drove individuals, especially men, to retire and claim benefits earlier.
Chapter 8. The Effects of Social Insurance Benefits on Leaving Employment at Older Ages in the Netherlands
DOI: 10.7208/chicago/9780226836362.003.0009
[Aging populations;social insurance programs;reforms;benefits;employment;older workers;The Netherlands]
In the Netherlands, from 1989 to 2013, for those aged55-63, the annual exit rate from employment to receiving social insurance benefits decreased from around 17 percent to 7 percent for men and from 14 percent to 5 percent for women. Less generous social insurance benefits have had small but significant negative effects on these exit rates: the annual exit rate would have been about 14 percent higher for both men and women in 2013 if the social insurance benefits schemes of 1989 had still been in place. This amounts to staying employed an average three months longer from age 55 onwards in 2013 than in 1989. These findings are partly driven by the 2007 reduction in the maximum duration of unemployment insurance benefits, but predominantly by making (early) retirement schemes actuarially fair from 2006. The increase in disability insurance’s income replacement rate in 2006 has led to a slight increase in the exit rate from employment, conditional on eligibility. As the effects of benefits changes from 1989 to 2013 on working beyond age 55 are relatively small, they suggest the importance of other factors, including changes in workers’ skills, improved health, and tighter social insurance eligibility criteria.
Chapter 9. The Effects of Social Security Incentives on Retirement in Spain
DOI: 10.7208/chicago/9780226836362.003.0010
[benefits;ITAX;implicit tax;incentives;Spain;pension;reforms;employment;labor force participation]
In this paper, we analyze the extent to which financial incentives have influenced individuals’ and couples’ retirement decisions over the last two decades in Spain. We use administrative data on earnings histories to create synthetic measures of financial incentives that we link to individual survey data from the European Community Household Panel and the European Union Statistics on Income and Living Conditions. The occurrence of several major reforms in the period largely facilitates identification. We find that retirement is highly responsive to incentive variables (both ITAX and SSW). We find that a 10% change in the implicit tax rate on working longer increases the probability of retiring by about 0.70 pp (0.90 pp for men and 0.54 for women). Furthermore, we find that couple incentives matter more in the husband’s retirement decisions than in the wife’s retirement decisions.
Chapter 10. Pension Reform, Incentives to Retire, and Retirement Behavior: Empirical Evidence from Swedish Micro-data
DOI: 10.7208/chicago/9780226836362.003.0011
[retirement;pension reform;incentives to retire;benefits;ITAX;implicit tax;Sweden;insurance;working longer;labor force participation]
This paper investigates to what extent the 1998 reform of Sweden’s public old-age pension system contributed to the increase in extensive margin labor supply among older workers seen in the country in recent decades. We use a large dataset containing all males and females born in Sweden between 1927 and 1950 and observe their retirement behavior during 1991–2012. The data show that the reform changed the incentives to remain in the labor force ambiguously: although it induced an income effect towards later retirement through lower replacement levels, it also implied a lower price on leaving the labor market under some assumptions. We use an econometric model in which the economic incentives to stay in the labor market are measured by Social Security Wealth, defined at each hypothetical retirement age, and a variable measuring the implicit tax, imposed by the income security system, on staying in the labor force. The point estimates from our econometric model, which should be interpreted with caution, suggest that at most a small part of the increase in labor force participation of the elderly can be attributed to the pension reform.
Chapter 11. Are Longer Working Lives a Response to Changing Financial Incentives? Exploiting Micro Panel Data from the UK
DOI: 10.7208/chicago/9780226836362.003.0012
[benefits;ITAX;implicit tax;incentives;United Kingdom;pension;reforms;ELSA;labor force participation]
In the UK, as in many advanced economies, male and female employment rates at older ages have been rising since the mid-1990s. To what extent do changes to pensions systems explain this trend? We construct individual-level measures of the financial incentives to remain in paid work that pensions systems provide. We use UK state pension rules alongside information on individual private pensions to calculate the overall implicit tax each individual faces due to the change in pension entitlements resulting from an additional year of work. Linear probability and probit models find a positive association of wealth with labour market exit, and a mild but positive association with implicit taxes. Including individual fixed effects suggests that the association of labour market exit with wealth is not causal, but likely to be driven by unobserved heterogeneity, and that a 10ppt rise in the implicit tax rate causes a statistically significant 0.4ppt rise in the one-year-ahead exit rate (compared to a baseline rate of 8% amongst 55 to 74 year-olds). We find consistent evidence that crossing the State Pension Age threshold causes a 4-5ppts rise in the labour market exit rate, even when controlling for the changing financial incentives at that threshold.
Chapter 12. Changing Retirement Incentives and Retirement in the US
DOI: 10.7208/chicago/9780226836362.003.0013
[benefits;pension;incentives;reforms;ITAX;implicit tax;social security;labor force participation;United States]
Employment rates of older Americans have been rising since the 1990s. While the US is fairly unique among advanced economies in not experiencing any large-scale pension reforms in recent decades, there have been multiple changes to Social Security policy that have strengthened the incentive to work at older ages. This study builds on prior work documenting the changes in retirement incentives over time to explore the effect of these changes on retirement behavior, using over two decades of data from the Health and Retirement Study (HRS). Regression results indicate that workers who face a higher implicit tax rate on additional work have an increased probability of retirement. Counterfactual simulations suggest that the changes in Social Security incentives since the early 1990s that result from increases in the Full Retirement Age and Delayed Retirement Credit can explain around one-fifth of the increase in work at ages 65 to 69, but essentially none of the increase at younger ages.
