Employer pay policies, public transfers and the retirement decisions of men and women in Denmark

The empirical retirement literature measures individual responses to variations in income flows due to public transfers, private individual or employer-provided pensions. We estimate a model accounting for the incentive effects from these sources. A dynamic structural model is extended to allow both individual and employer heterogeneity. This is applied to a Danish matched panel of workers and establishments, spanning a period of reforms to a public early retirement programme. Employer-specific compensation is found to be an important determinant of work and retirement income flows. Employer effects on retirement age are only found among sub-samples where access to public transfers is limited.     

Labour-incentive reforms at preretirement age in Austria

Low participation rates of older workers in the labour market threaten the sustainability of the pension system in Austria. Given the current political debate on this issue, we try to shed light on employment and retirement behaviour of Austrian couples when income support is provided and pension benefits are reduced. Using a sample of married couples with both partners aged 50–65, we find that the proposed reform increases the labour supply of middle-income men whereas the effects on women are weaker. However, somehow surprisingly, we find that these reforms have an increasing effect on unemployment/inactivity probabilities which in turn is outweighed by a decreasing effect on the retirement probabilities in case of women. These findings emphasize the importance of a joint consideration of labour supply and retirement behaviour of married couples when introducing pension reforms and tax-benefit policies.     

Retirement in Australia: A Closer Look at the Financial Incentives

In Australia, labour force participation among older people has been declining. Previous research has found that in many OECD countries, the retirement income system actually provides a financial incentive for older workers to retire early. In this article, we model the retirement behaviour of Australian men and women aged between 55 and 70 years, where individuals retire in the period that the present value of their lifetime retirement income is maximised. Our findings suggest that the Australian retirement system does provide an incentive to retire early. However, men are much more likely than women to respond to these financial incentives.     

PORTFOLIO ALLOCATION IN THE FACE OF A MEANS‐TESTED PUBLIC PENSION

We investigate whether households adjust their asset portfolios just prior to retirement in ways that are consistent with maximizing eligibility for a means‐tested public pension. We utilize detailed micro data for a nationally‐representative sample of Australian households to estimate a system of asset equations which are constrained to add up to net worth. Our results provide little evidence that healthy households or couples are responding to the incentives embedded in the means tests determining pension eligibility by reallocating assets. While there are some differences in asset portfolios associated with having an income near the income threshold, being of pensionable age, and being in poor health, these differences are often only marginally significant and are not clearly consistent with the incentives inherent in the Australian age pension eligibility rules. Any behavioral response to the incentives inherent in the age‐pension means test appears to be predominately concentrated among single pensioners who are in poor health.     

International Comparisons of Living Standards by Equivalent Incomes*

We propose a measure of living standards for international comparisons. Based on GDP per capita, the measure incorporates corrections for international flows of income, labor, risk of unemployment, healthy life expectancy, household demography and inequalities. The method for comparing populations that differ in some non‐income dimension consists of computing the equivalent variation of income that would make each population indifferent between its current situation and a reference situation with respect to the non‐income dimension. This is applied to 24 OECD countries. The obtained ranking of countries differs substantially from the GDP ranking.     

Social Desirability of Earnings Tests

Abstract. In many countries, pension systems involve some form of earnings test; i.e. an individual's benefits are reduced if he has labor income. This paper examines whether or not such earnings tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and in their health status. The working life of an individual has two 'endings': an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labor income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before. We show under which conditions earnings tests emerge both under a linear and under a non-linear tax scheme. In particular, we show that earnings tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.     

The effects of longevity and distortions on education and retirement

This article studies the impact of longevity and taxation on life-cycle decisions and long run income. Individuals allocate optimally their total lifetime between education, working and retirement. They also decide at each moment how much to save or consume out of their income, and, after entering the labor market, how to divide their time between labor and leisure. The model incorporates experience–earnings profiles and return to education function that follows evidence from the labor literature. In this setup increases in longevity raises the investment in education—time in school—and retirement. The model is calibrated to the US and is able to reproduce observed schooling trends of the last century. It also reproduces the increase in retirement, as the evidence shows. Simulations show that a country equal to the US but with 20% smaller longevity will be 25% poorer, mostly because of the impact of life expectancy on human capital formation and retirement. In this economy labor taxes have a strong impact on the per capita income, as it decreases labor effort, time at school and retirement age, in addition to the general equilibrium impact over physical capital.     

Welfare effects of automatic-IRAs

Several states require employers who do not offer retirement benefits to automatically enroll their employees in individual retirement accounts (IRAs). We quantify the welfare effects of this program for individuals who follow a rule-of-thumb to make savings decisions. We find workers who save more than 3% would be willing to give up 0%–1.4% of lifetime consumption to avoid an IRA. We also consider a fully rational model with credit frictions, stochastic income and pre-retirement withdrawals, and costly IRA opt-outs. We find that being enrolled in an IRA is most likely to benefit workers who do not borrow during the life-cycle.     

Early Retirement and Economic Incentives

In Norway, early retirement programmes have gradually reduced the retirement age from 67 to 62 for a majority of the labour force. Based on micro data for 1990 and 1992, we estimate a competing-risk model with three states: full retirement, partial retirement/part-time work and full-time work. We then use the estimated model in simulations to study how financial incentives can be strengthened to extend working life. Financial incentives, educational background and industry affiliation are found to influence retirement behaviour. For low and medium incomes, the tax system shifts the incentives heavily towards early retirement and, in particular, towards partial retirement combined with part-time work.     

Consumption growth,saving and retirement in the U.K.

This paper examines age profiles of consumption and income from 25 successive years of the U.K. Family Expenditure Survey, looking in particular at households as they retire. We break down income and expenditure data for different cohorts and assess how they change over the life-cycle and around the time of their retirement. We then compare periods of unemployment and retirement and separate expenditures into some broad categories. Using stochastic Euler conditions we assess the anticipated impact of retirement against that of unemployment. It emerges that although income typically falls by more at unemployment than retirement the reverse is true for expenditure. Since the Euler equation results point to each having similar anticipated effects on consumption, the only way in which the life-cycle hypothesis (LCH) could be reconciled with this would be with the arrival of new information at the time of retirement.     

Saving and the intra-household distribution of income: an empirical investigation

This paper presents an empirical analysis of the relationship between household saving and the distribution of income within the household. Various theoretical reasons why the level of saving might depend on the latter are given. Some of these can be rationalized within the usual “unitary” model of household decision but others recognize explicitly that different members of the household may have different preferences about how much to save.Particular attention is paid to saving for retirement since the facts that wives are, on average, younger than their husbands and women have longer life expectancies means that wives typically anticipate a longer retirement period than their husbands. Thus wives may prefer to save more for retirement than their husbands.The empirical analysis uses a sample of Canadian households from five Family Expenditure Surveys. These surveys include measures of financial saving as well saving in retirement accounts. After accounting for many of the other influences on saving (for example: age, household composition, occupation and education levels but not household income) we find some effects of the intra-household distribution of income on savings rates. The parameter estimates suggest that the household saving rate decreases with the share of the wife in household income.     

Labor supply of elderly people,fertility, and economic development

Increases in life expectancy and the fertility rate have been observed as per-capita income increases in economically developed countries with high per-capita income. We explain these observations using a synthetic economic model with endogenous lifetime, retirement, and human capital accumulation. In contrast to the result obtained by assuming an institutionally fixed and compulsory retirement, a longer life expectancy attributable to rises in per-capita income can induce elderly people to leave the labor market later, thereby enabling them to increase consumption of goods as well as “children” when young. Consequently, higher per-capita income can be associated with higher fertility.     

International Financial Flows in Low‐Income Countries

For a sample of low‐income countries, we analyse the behaviour of international financial flows during three periods: (i) the 2003–2007 global boom; (ii) the 2008–2009 crisis; and (iii) the 2010–2012 recovery phase. In particular, we examine aid‐adjusted net financial inflows, debt inflows, foreign direct investment inflows and official reserve outflows. We highlight the role of country characteristics in explaining the cross‐country variation in international financial flows during these different phases.     

TAXES,INCOME, AND RETIREMENT SAVINGS: DIFFERENCES BY PERMANENT AND TRANSITORY INCOME

This article examines the determinants of and benefits from saving for retirement in tax‐preferred accounts by permanent and transitory income levels. We find that higher incomes (both permanent and transitory) are associated with a greater probability to contribute and larger contributions. We also find that tax benefits for retirement savings increase strongly with income, although the increase is slightly smaller when taxpayers are ranked by their permanent (rather than current) income. In addition, we find that a large portion of the benefits from the Saver's Credit go to taxpayers who would not be eligible based on their permanent income. Finally, we find that recent tax changes (including the introduction of the Saver's Credit) significantly increased contributions among low‐income households, although the effect was centered among those with only transitorily low income. (JEL H24, H31, E21)     

Retirement and health behaviour

This article investigates whether and to what extent retirement changes health behaviour. For identification we use an instrumental variable approach that exploits exogenous variations in the early and normal retirement ages within and across 10 European countries. Our results reveal that among those who abstained from alcohol and vigorous or moderate exercise at baseline, retirement increased those activities. Non-smokers did not increase smoking upon retirement. Retirement led to less smoking for those who smoked before retiring. It also brought about an increase in vigorous exercise for those who had the behaviour at baseline. These results further vary by a person’s job type, but less so with respect to gender or geographic region. Overall, our findings provide new empirical evidence on the causal link between retirement and health behaviours and how such link relates to four sources of individual heterogeneity: gender, European geographic region, job type and baseline health behaviour.     

Do retirement planning strategies alter the effect of time preference on retirement wealth?

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.     

The effect of social security,health, demography and technology on retirement

This article studies the determinants of the labor force participation of the elderly and investigates the factors that may account for the increase in retirement in the second half of the last century. We develop a lifecycle general equilibrium model with endogenous retirement that embeds Social Security legislation and Medicare. Individuals are ex ante heterogeneous with respect to their preferences for leisure and face uncertainty about labor productivity, health status and out-of-pocket medical expenses. The model is calibrated to the U.S. economy in 2000 and is able to reproduce very closely the retirement behavior of the American population. It reproduces the peaks in the distribution of Social Security applications at ages 62 and 65 and the observed facts that low earners and unhealthy individuals retire earlier. It also matches very closely the increase in retirement from 1950 to 2000. Changes in Social Security policy – which became much more generous – and the introduction of Medicare account for most of the expansion of retirement. In contrast, the isolated impact of the increase in longevity was a delaying of retirement.     

Cognitive function, numeracy and retirement saving trajectories

This paper examines the extent to which cognitive abilities relate to differences in trajectories for key economic outcomes as individuals move towards and through their retirement. We look at whether differences in baseline numeracy (measured in the English Longitudinal Study of Ageing in 2002) and broader cognitive ability predict the subsequent trajectories of outcomes such as wealth, retirement income and key dimensions of retirement expectations. Those with lower numeracy are shown to have different wealth trajectories both pre- and post-retirement than their more numerate counterparts, but the distributions of retirement expectations and net replacement rates are similar across numeracy groups.     

THE WEALTH EFFECTS OF INCOME INSURANCE

Precautionary savings models suggest that wealth should rise with income risk. Risk is reduced by means-tested transfers, however, which implies that transfer programs should discourage private wealth accumulation. We offer a comprehensive empirical assessment based on variation across states in the generosity of a number of programs, specifically unemployment insurance and means-tested transfers (Aid to Families with Dependent Children and Food Stamps). We use monthly data on married couples from the Survey of Income and Program Participation (SIPP) to regress wealth on income, income risk, and various measures of transfer generosity. The results support the precaution-ary savings model and reveal moderate negative wealth effects of both unemployment insurance and means-tested transfers, with an elasticity of about −0.18.