Wages,productivity, and retirement

Pensions, both state provided and privately provided, affect incentives to retire. But private pensions are part of the long term compensation package, and altering pensions not only affects retirement incentives, but also wages. A key factor in determining whether retirement occurs at the appropriate age is the relation of productivity to alternatives. When wages, coupled with public and private pension accrual, deviate from worker productivity, private retirement incentives are distorted. Sometimes this results in too much early retirement, creating fiscal difficulties. Sometimes, it results in a desire for delayed retirement, which argues for mandatory retirement rules. Pay compression, where wages do not vary across individuals as much as productivity, exacerbate distortions. Defined benefit pension plans tend to create incentives to retire after a certain number of years of work. Defined contribution plans do not have this feature. Public plans should be designed noting their interaction with incentives that are already inherent in the private wage and pension schemes.