lecture 4: pensions and labour markets · 2020-02-04 · i. facts measurement 1 labour force...
TRANSCRIPT
Lecture 4: Pensions and labour markets
Antoine Bozio
Paris School of Economics (PSE)
Ecole des hautes etudes en sciences sociales (EHESS)
Master PPDParis – February 2020
1 / 112
Introduction
1 What is retirement ?• Withdrawing from the labour force ?• Reducing hours of work ?• Claiming a pension ?
2 Labour vs public economics• Labour economics : supply/demand for labour• Public economics : impact of public pensions/mandatory
savings
2 / 112
Outline of the lecture
I. Facts about retirement
II. Modelling retirement
III. Impact of pensions on retirement
IV. Early retirement policies
3 / 112
I. Facts
1 Measurement issues
2 Decline in labour force participation of older men(1880-1985)
3 Large cross-country heterogeneity
4 Increase in labour force participation of older workers since1990
4 / 112
I. FactsMeasurement
1 Ambiguity of retirement• Retirement and unemployment• Part time work
2 Partial retirement• Progressive decrease in hours of work• Change of job while claiming a pension
3 Retirement as absorbing state ?• Used to be thought that retirement was irreversible• Now not anymore the case
5 / 112
I. FactsMeasurement
1 Labour force surveys• Since late 1960s• Little information on pensions
2 Retirement surveys• US Retirement history survey (1969-79)• UK Retirement survey (1989-94)
3 New Ageing surveys• Health and retirement survey (HRS) : 1992-2014• English Longitudinal Study of Ageing (ELSA) : 2002-2014• Survey of Health, Ageing and Retirement in Europe
(SHARE) : 2004-2013• Japanese Study of Aging and Retirement (JSTAR) :
2007-20116 / 112
Figure 1 – LFP rates of men aged 65 and over (1850–1990)
0%
10%
20%
30%
40%
50%
60%
70%
80%
1840 1860 1880 1900 1920 1940 1960 1980 2000
US
UK
France
Germany
Source : Costa (1998), Table 2A.2, p. 29.
7 / 112
Figure 2 – LFP rates of U.S. men aged 18 to 85 (1880–1990)
Source : Costa (1998), Fig. 2-5, p. 12.
8 / 112
Figure 3 – LFP rates of men aged 60 to 64 (1960-1994)
Source : Gruber and Wise (1999), Fig. 1A, p. 3.
9 / 112
Figure 4 – LFP rates of men aged 60 to 64 (1960-1994)
Source : Gruber and Wise (1999), Fig. 1B, p. 3.
10 / 112
Figure 5 – Employment rates of men aged 50 to 74 (1977)
Source : Blundell, Bozio and Laroque (2013).
11 / 112
Figure 6 – Employment rates of men aged 50 to 74 (1987)
Source : Blundell, Bozio and Laroque (2013).
12 / 112
Figure 7 – Employment rates of men aged 50 to 74 (1997)
Source : Blundell, Bozio and Laroque (2013).
13 / 112
Figure 8 – Employment rates of men aged 50 to 74 (2007)
Source : Blundell, Bozio and Laroque (2013).
14 / 112
Figure 9 – Employment rates of men by mortality rates (1977)
Source : Blundell, Bozio and Laroque (2013).
15 / 112
Figure 10 – Employment rates of men by mortality rates (2007)
Source : Blundell, Bozio and Laroque (2013).
16 / 112
Figure 11 – Employment rates of men aged 55 to 74
0%
10%
20%
30%
40%
50%
60%
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
US
UK
FR
GER
Source : Blundell, Bozio and Laroque (2013).
17 / 112
II. Modelling retirement
1 A simple lifetime retirement model
2 Option value model
3 Dynamic programming models
18 / 112
II. Modelling retirementA simple retirement model• Lifetime budget constraint
• Live T years, work L years, retired R = T − L years• Constant wage w , interest rate r = 0• Lifetime consumption C , lifetime leisure R
• Lifetime utility maximisation
maxL
U(R ,C )s.t.C <= (T − R)w
• Standard demand for leisure framework• Leisure is a normal good• Increase in income leads to a decrease in retirement age R
(more leisure)• A wage increase leads to income and substitution effects,
hence ambiguous effect on retirement19 / 112
II. Modelling retirementA simple retirement model
• Income effects• Long-term trend in decreasing retirement age• Could be explained by income effects• Being richer, we consume more leisure
• Limits• Value of market time independent of age• Value of leisure independent of age• No reason for bunching of leisure at the end of life
20 / 112
II. Modelling retirementOption value model• Stock and Wise (1990)
• Individuals assess utility of retiring at each date• Individuals retire if value of retiring now is higher than
retiring later• Irreversibility of retirement decision
• Model setup• People earns Ys while working in year s• Receive pension Bs(r) when retiring at age r• Value at date t of future income, discounted at rate β,
when retiring at age r :
Vt(r) =r−1∑s=t
βs−tU(Ys) +T∑s=r
βs−tU(Bs(r))
21 / 112
II. Modelling retirementOption value model
• Optimal retirement age• Gains from postponing retirement :
Gt(r) = EtVt(r)− EtVt(t)• r∗ is the year with highest expected value : r∗ solves
maxr EtVt(r)• Retirement decision if Gt(r
∗) = EtVt(r∗)− EtVt(t) < 0
• Parametrization of the model• U(Ys) = Y γ
s + ωs
• U(Bs) = (κBs(r))γ + ξs• γ is risk aversion relative to income uncertainty• κ is the value of income while working relative to its value
when retired• ωs and ξs are individual random effects
22 / 112
II. Modelling retirementOption value model
• Estimation technique• Retirement decision is Pr [Gt(r
∗) > 0]• Parameters κ, γ, β estimated by maximum likelihood
• Applications• Stock and Wise (1990) on a pension plan firm data• Lumsdaine, Stock and Wise (1992)• Blanchet and Mahieu (2004) and Mahieu and Walraet
(2005) on French data
23 / 112
II. Modelling retirementDynamic programming models
• Stochastic dynamic programming models• Dynamic : budget constrain, health, earnings• Stochastic : uncertainty around earnings, health, asset
returns• Structural : generability of results based on structure
• Key papers• Gustman and Steinmeier (Econometrica, 1986)• Rust and Phelan (Econometrica, 1997)• French (RESTUD, 2005)
24 / 112
III. Impact of pensions on retirement
1 Implicit pension tax
2 Early US estimates
3 Cross-country evidence
4 Recent evidence
5 Evidence on France
25 / 112
III. Impact of pensions on retirementImplicit pension tax
• Lifetime budget constraint• Live T years, work R years• Constant wage w , interest rate r = 0• Lifetime consumption C = wR
• Actuarially fair pension• Pension b(R), tax rate τ• b(R) = τR
T−R• Then C = (w − τ)R + b(R)(T − R) = wR• No effect on lifetime budget constraint• Actuarially fair system does not affect retirement age under
the assumption of no uncertainty, no myopia, no creditconstraint
26 / 112
III. Impact of pensions on retirementImplicit pension tax• Not actuarially fair pensions
• C = (w − τ)R + b(R)(T − R)• dC
dR = w − τ − b + (T − R)b′(R)• Substitution and wealth effects
• Implicit tax• (1− t)w = dC
dR• If you delay retirement by 1 year, PDV of consumption
increases by dCdR
• t = w−dC/dRw
• Case with no adjustment in benefit• b′(R) = 0⇒ dC
dR = w − τ − b• If b = 0.75w and τ = 0.25w• Then dC
dR = 0, t = 100%
27 / 112
III. Impact of pensions on retirementEarly U.S. estimates
• Empirical methods
1 Time-series evidence
LFPt = α + βBt/wt + εt
2 Cross-sectional evidence
LFPi = α + βBi/wi + εi
• Not very conclusive literature• Boskin and Hurd (1978) : strong effects of pensions• Burkhauser and Qinn (1983) : no effect• Burtless (1986) : little impact
28 / 112
III. Impact of pensions on retirementEarly U.S. estimates• Identification issues
1 Income effect correlated with development of publicpensions (colinearity)
2 Pension is a function of past earnings and past career,likely to influence propensity to retire
• Kruger and Pischke (JOLE, 1992)• Critique of previous literature : lack of proper source of
exogenous identification• Use US SS notch as natural experiment• Find small wealth effect of SS on retirement
• US social security notch• 1977 amendments : lower benefits for those born after Jan.
1917 (“notch babies”)
29 / 112
Figure 12 – Average monthly SS benefit for workers retiring atage 65
Source : Krueger and Pischke (1992), Fig. 2.
30 / 112
III. Impact of pensions on retirementRetirement hasard spikes
• Retirement hasard spikes• Retirement hasard at age a is the fraction of people who
retire at age a among those still working at age a− 1
• Spikes are common• US : early retirement age at 62, full-rate at age 65• France : full-rate at age 60 (pre 1993)• Spikes move when pension rules are changed
• Evidence of large pension effects• Either non-rational behaviour or liquidity effects
31 / 112
Figure 13 – Hasard rate out of labour force in the US
Source : Coile and Gruber (2007), Fig. 1.
32 / 112
Figure 14 – Hasard rate out of labour force in the US (1960)
Source : Gruber and Wise (1999), Fig. 12, from Burtless and Moffitt (1984).
33 / 112
Figure 15 – Hasard rate out of labour force in the US (1970)
Source : Gruber and Wise (1999), Fig. 12, from Burtless and Moffitt (1984).
34 / 112
Figure 16 – Hasard rate out of labour force in the US (1980)
Source : Gruber and Wise (1999), Fig. 12, from Burtless and Moffitt (1984).
35 / 112
Figure 17 – Hasard rate out of labour force in France (1972)
Source : Gruber and Wise (1999), Fig. 9.A, p. 14 ; Blanchet and Pele (1999)
36 / 112
Figure 18 – Hasard rate out of labour force in France (1986)
Source : Gruber and Wise (1999), Fig. 9.D, p. 15 ; Blanchet and Pele (1999).
37 / 112
III. Impact of pensions on retirementCross-country evidence
• NBER International social security (ISS) group• Researchers from different countries• Using micro-data in a cross-country framework• Led by Jon Gruber and David Wise
• Gruber and Wise (1998, 1999)• Documenting pension reforms over time• Computation of measure of tax incentive through pension• Correlate pension tax with labour force participation
38 / 112
Figure 19 – Tax rate on work in France
Source : Gruber and Wise (1999), Fig. 10, p. 16 ; Blanchet and Pele (1999).
39 / 112
Figure 20 – Hasard rate out of labour force in France
Source : Gruber and Wise (1999), Fig. 11, p. 16 ; Blanchet and Pele (1999).
40 / 112
Figure 21 – Unused capacity vs. tax force
Source : Gruber and Wise (1999), Fig. 17.B, p. 32.
41 / 112
III. Impact of pensions on retirementRecent evidence
• Coile and Gruber (RESTAT, 2007)• Use forward-looking pension incentives (Stock and Wise,
1990)• Reduced-form regression framework
• Social security wealth (SSW)• SSWt(r) is the present discounted value (PDV) of pension
wealth at date t, when retiring at r
SSWt(r) =T∑s=r
β(s−t)ps|tBs(r)
• β discount factor ; ps|t probability to survive until sconditioned on having survived until t
42 / 112
III. Impact of pensions on retirementRecent evidence
• Accrual• Gain to postpone retirement from 1 year
Accrualt = SSWt(r + 1)− SSWt(r)
• Implicit tax
Taxt = −AccrualtEtYt+1
• Peak value (PV)• Forward-looking incentive measure
PVt = maxx>=t+1
[SSWt(x)]− SSWt(t)
43 / 112
III. Impact of pensions on retirementRecent evidence
• Option value (OV)• Following Stock and Wise (1990)• Derive utility measure of option to remain in work at age a
U(a, R) =R∑
u=a
β(u−a) w
1−γ
1− γs(u|a) +
ω∑u=R
β(u−a) (κp(R))1−γ
1− γs(u|a)
• Use previously estimated parameters for γ, κ• Derive option value
OVt = maxr
[U(t; r)]− U(t; t) = U(a; r)− U(a; a)
44 / 112
III. Impact of pensions on retirementRecent evidence• Regression framework
• Probit estimation
Rit = β0 + β1RWit + β2IVit + β3Xit + εit
• R worker retires, RW PDV of pensions, IV incentivevariable, X controls
• Results on U.S. data• β1 > 0 ; β2 < 0 i.e. higher gains for postponing retirement
reduce retirement probability, while higher pension wealthincreases probability of retirement
• But no account of spikes of hasard rate at 62 and 65
• Other applications• Cross-country (Gruber and Wise, 2004)
45 / 112
III. Impact of pensions on retirementRecent evidence
• Earnings test• Limit on earnings while claiming pensions• US earnings test partly removed in 2000• UK earnings rule repelled in 1989• French rules on cumul emploi retraite
• U.S. Earnings test today• 62 < Age < NRA, 50% tax above $13,500• No earnings test above NRA• Normal retirement age (NRA) today 66 (increasing
progressively to 67)• Benefits taxed away will be credited back at NRA
46 / 112
Figure 22 – Budget constraint of the earnings test
Source : Friedberg (RESTAT, 2000), Fig. 1, p. 49
47 / 112
Figure 23 – Changes in the US earnings test
Source : Gelber, Jones and Sachs (2019), Fig. 1.
48 / 112
III. Impact of pensions on retirementRecent evidence
• Friedberg (RESTAT, 2000)• Exploit changes in the US earnings test• Use CPS data• Assess bunching before the threshold
• Changes exploited
1 1978 increase in the exempt amount for the 65-712 1983 reform removed the earnings test for 70 and 71 years
old3 1990 decline in the tax rate (from 50% to 33%) for the
65-69
49 / 112
Figure 24 – Earnings distribution at the earnings test (1980-81)
Source : Friedberg (RESTAT, 2000), Fig. 3.
50 / 112
Figure 25 – Earnings distribution at the earnings test (1983-84)
Source : Friedberg (RESTAT, 2000), Fig. 3.
51 / 112
III. Impact of pensions on retirementRecent evidence
• Labour supply estimation• Piece-wise linear budget constraint• log(H) = β0 + β1w(1− τ) + β2Yv + β3X• Exploit the change in earnings test to generate changes in
net earnings and virtual income• To obtain substitution and income elasticities
• Results• Large income and substitution elasticities• Large implied deadweight loss of earnings test• Removing earnings test would lead to 5.3% increase in
hours worked
52 / 112
III. Impact of pensions on retirementRecent evidence
• Gelber, Jones and Sachs (AEJ-AE, 2020)• Exploit recent changes in the U.S. earnings test• 2000 removal of the test above NRA• Use bunching estimation techniques (Saez, 2010)
• Results• Significant bunching at kinks• Bunching slowly removed over time (inertia)
53 / 112
Figure 26 – Earnings histogram by age (1990 to 1999)
Source : Gelber, Jones and Sachs (2019), Fig. 2.A
54 / 112
Figure 27 – Normalized Excess Mass by Age (1990 to 1999)
Source : Gelber, Jones and Sachs (2019), Fig. 2.B.
55 / 112
Figure 28 – Earnings histogram by age (1983 to 1999)
Source : Gelber, Jones and Sachs (2019), Fig. 4.A. 56 / 112
III. Impact of pensions on retirementRecent evidence
• Gelber, Jones, Sachs and Song (forthcoming JHR)• Data from U.S. Social Security Administration : 9 million
individuals over 1968 to 1987• Estimation strategy is difference-in-differences• Comparison of the probability to have positive earnings
conditional on having earnings pre age 63 above or belowthe earnings test
• Results• Large employment effect of the earnings test : -3.3 pp of
employment rate for Americans aged 63-64
57 / 112
Figure 29 – Probability of positive earnings by age and earningsrelative to exempt amount
Source : Gelber, Jones, Sachs and Song (forthcoming JHR), Fig. 6.58 / 112
Figure 30 – Difference between probability of positive earningsamong those earning above and below the exempt amount, by age
Source : Gelber, Jones, Sachs and Song (forthcoming JHR), Fig. 7.59 / 112
Manoli and Weber (AEJ-EP, 2016)
• Institutional design• Mandated lump-sum cash retirement benefit in Austria
(severance pay)• Amount depends on job tenure at retirement (10, 15, 20
and 25 years)• Use administrative data (Social security data merged with
tax data)
• Evidence• Non-parametric evidence of bunching at tenure thresholds• Discontinuity in retirement decision according to tenure• Estimation of retirement age elasticities
60 / 112
Figure 31 – Distribution of tenure at retirement
200
400
600
800
1000
Indi
vidu
als
10 15 20 25Years of Tenure at Retirement
Manoli and Weber () Financial Incentives at Retirement
�
��
� ���
Source : Manoli and Weber (2016), Fig. 2.
61 / 112
Figure 32 – Mean Severance Payments, Responder Sample
.15
.2.2
5.3
.35
Seve
ranc
e Pa
y Fr
actio
n
6 7 8 9 10 11 12 13Years of Tenure at Retirement
A. 10 Year ThresholdManoli and Weber ()
Financial Incentives at Retirement �
�
��
�
Source : Manoli and Weber (2016), slides.
62 / 112
Figure 33 – Mean Severance Payments, Responder Sample
.3.3
5.4
.45
.5Se
vera
nce
Pay
Frac
tion
12 13 14 15 16 17 18Years of Tenure at Retirement
B. 15 Year Threshold
Manoli and Weber () Financial Incentives at Retirement
Source : Manoli and Weber (2016), slides.
63 / 112
Figure 34 – Mean Severance Payments, Responder Sample
.55
.6.6
5.7
.75
Seve
ranc
e Pa
y Fr
actio
n
17 18 19 20 21 22 23Years of Tenure at Retirement
C. 20 Year Threshold
Manoli and Weber () Financial Incentives at Retirement
� � � � �� � �� �
�
Source : Manoli and Weber (2016), slides.
64 / 112
Manoli and Weber (AEJ-EP, 2016)• Participation semi-elasticity
• Quantify the magnitude of participation response tochange in financial incentives
ε(t0) =1− r(t0)
4(1− τ(t0))
• where r(t0) denotes the probability of retiring at tenurelevel (t − t0) and τ(t0) refers to the implicit tax rate onworking the additional t0 periods until the threshold isreached
• Results• Semi-elasticities between 0.14 and 0.28• highest estimated semi-elasticities at 6 to 9 months prior to
a tenure threshold• potential effectiveness of bonuses targeted at short delays
65 / 112
Figure 35 – Estimating change in retirement
Manoli and Weber () Financial Incentives at Retirement
�
�� � � ��� �
�
� � �
Source : Manoli and Weber (2016), Fig. 6.
66 / 112
Figure 36 – Participation elasticities
Source : Manoli and Weber (2016), Tab. 3.
67 / 112
III. Impact of pensions on retirementEvidence on France
• Bozio (2006, 2008)• Exploit the 1993 pension reform• Use of administrative data• Very significant effects of pension rules
• The 1993 pension reform• First reform aiming to increase retirement age• Only affected private sector workers
• Regime general (Cnav) formula• P pension, PC proportionality coefficient, Wref reference
earningsP = τ ∗ PC ∗Wref
68 / 112
III. Impact of pensions on retirementEvidence on France
• Pension rate formula• δ the penalty, of 10 %, N1 the required contribution length
and D1 the contribution length of the worker
τ = 0.50∗
[1− δ ∗max
{0,min
[(65−AGE ), (N1−D1)
]}]
• The 1993 pension reform
1 Wref is computed with the best 25 years and not the best10 years
2 N1 increases from 150 quarters to 160 quarters (37.5 to 40years) - N2 remains at 150 quarters
3 Pension benefits are indexed on inflation and not anymoreon wage growth
69 / 112
Figure 37 – Distribution of contribution length at pension claim
Source : Bozio (2008), Fig. .
70 / 112
Figure 38 – Distribution of contribution length at pension claim
Source : Bozio (2008), Fig. .
71 / 112
Figure 39 – Distribution of contribution length at pension claim
Source : Bozio (2008), Fig. .
72 / 112
Figure 40 – Distribution of contribution length at pension claim
Source : Bozio (2008), Fig. .
73 / 112
III. Impact of pensions on retirementEvidence on France
• Estimation strategy• Use gen x contribution length at 60 as instrument for
change in pension benefits• Use cohorts born before 1934 as control groups
• Results
1 Very large claiming elasticity2 Large work elasticity3 Impact on probability of claiming incapacity pensions
74 / 112
Figure 41 – Impact of 1993 reform on retirement age
-10
12
34
Cla
imin
g ag
e in
crea
se (i
n qu
arte
rs)
130 140 150 160 170 180Contribution length at age 60 (in quarters)
Cohort 1932Cohort 1933
Source : Bozio, Garrouste and Perdrix (2019). 75 / 112
Figure 42 – Impact of 1993 reform on retirement age
-10
12
34
Cla
imin
g ag
e in
crea
se (i
n qu
arte
rs)
130 140 150 160 170 180Contribution length at age 60 (in quarters)
Cohort 1933Cohort 1936Cohort 1938
Source : Bozio, Garrouste and Perdrix (2019). 76 / 112
Figure 43 – Impact of 1993 reform on retirement age
-0,5
0
0,5
1
1,5
2
2,5
130-131
132-135
136-138
139-140
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
Source : Bozio (2008), Fig. .
77 / 112
III. Impact of pensions on retirementRecent evidence
• Manoli and Weber (2018)• Increase in early retirement age (ERA) in Austria• Men from 60 to 62, Female from 55 to 57• Use administrative data
• Results
1 Very strong effect on claiming age2 Strong effect on retirement decision3 Spillover effects on groups not affected
78 / 112
III. Impact of pensions on retirementRecent evidence
• Austrian old age pension system• NRA is 65 for men, 60 for women• ERA is 60 for men, 55 for women• Conditions of 35 years of insurance to qualify for early
retirement pensions
• 2000 and 2004 reforms• Increase in ERA to 62 (men) and 57 (women)• Increase in penalty for early retirement from 3-5% to 8-9%
79 / 112
Figure 44 – Increase in ERA in Austria (male)
Notes: The first two vertical lines mark the beginning and ending of changes implemented under the 2000 and 2004 pension reform.
Source : Manoli and Weber (2018), Fig. 1.
80 / 112
Figure 45 – Increase in ERA in Austria (female)
Notes: The first two vertical lines mark the beginning and ending of changes implemented under the 2000 and 2004 pension reform.
Source : Manoli and Weber (2018), Fig. 1.
81 / 112
Figure 46 – Percent Change in benefits at ERA
.02
.03
.04
.05
.06
.07
.08
.09
Perc
ent
1939 1941 1943 1945 1947 1949 1951 1953Birth Cohort
A. Women -- Short Contribution Years
0.0
5.1
.15
Perc
ent
1939 1941 1943 1945 1947 1949 1951 1953Birth Cohort
B. Women -- Long Contribution Years.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9Pe
rcen
t
1934 1936 1938 1940 1942 1944 1946 1948Birth Cohort
C. Men -- Short Contribution Years
0.0
5.1
.15
Perc
ent
1934 1936 1938 1940 1942 1944 1946 1948Birth Cohort
D. Men -- Long Contribution Years
42
Source : Manoli and Weber (2018), Fig. 2.
82 / 112
Figure 47 – Age of claim by cohort (male)
Source : Manoli and Weber (2018), Fig. 6A.
83 / 112
Figure 48 – Fraction Claiming at Age 60 by Cohort andContribution Years (male)
Source : Manoli and Weber (2018), Fig. 9.84 / 112
Figure 49 – Fraction Exiting at Age 60 by Cohort andContribution Years (male)
Source : Manoli and Weber (2018), Fig. 9.85 / 112
Figure 50 – Fraction Claiming at Age 55 by Cohort andContribution Years (female)
Source : Manoli and Weber (2018), Fig. 9.86 / 112
Figure 51 – Fraction Exiting at Age 55 by Cohort andContribution Years (female)
Source : Manoli and Weber (2018), Fig. 9.87 / 112
III. Impact of pensions on retirementRecent evidence
• RDD for changes in financial incentives• Change in benefits according to quarter of birth• RDD estimate of impact on retirement• Estimates are small and not significant
• RKD for changes in ERA• Estimate change in slopes of retirement age w.r.t. change
in ERA eligibility• Large effects estimated
88 / 112
Figure 52 – Exit age from the labour force
5656
.557
57.5
5858
.5Ag
e in
yea
rs
1935 1937 1939 1941 1943 1945 1947 1949 1951 1953Birth Cohort
Women -- Short Contribution Years
5656
.557
57.5
5858
.5Ag
e in
yea
rs
1935 1937 1939 1941 1943 1945 1947 1949 1951 1953Birth Cohort
Women -- Full Sample58
58.5
5959
.560
Age
in y
ears
1930 1932 1934 1936 1938 1940 1942 1944 1946 1948Birth Cohort
Men -- Short Contribution Years
5858
.559
59.5
60Ag
e in
yea
rs
1930 1932 1934 1936 1938 1940 1942 1944 1946 1948Birth Cohort
Men -- Full Sample
Reduced Form
Source : Manoli and Weber (2018), Fig. 9.
89 / 112
III. Impact of pensions on retirementNorms, reference point
• Behaghel and Blau (AEJ-EP, 2012)• Exploit increase in FRA in the U.S. from 65 to 66• Estimate the effect of the increase in the FRA on the
hazard of exiting employment and claiming OASI pension
• Spikes at FRA• Spike in claiming hazard moved with FRA• Less clear evidence on labour market exit
• Results
1 FRA effect can account for 10-40% of the hazard at age 652 Individuals with higher cognitive ability respond more to
FRA changes3 Suggest reference dependence with loss aversion
90 / 112
Figure 53 – U.S. SS Benefit Claiming Hazard
Source : Behaghel and Blau (2012), Fig. 2.91 / 112
III. Impact of pensions on retirementNorms, reference point
• Seibold (2017)• Exploit discontinuities in German pension systems :
statutory ages, kinks in incentives• Use bunching techniques to infer elasticities
• Statutory ages• Early retirement age (ERA) : 60 to 65• Full retirement age (FRA) : 63 to 65• Normal retirement age (NRA) : 65
• Results
1 Large effects of statutory ages2 Much larger than financial incentives3 Rationalised with reference dependence
92 / 112
Table 1 – Statutory ages according to retirement pathwaysin Germany (after 1990s reforms)
Pathways Required contribution FRA ERA
Regular 5 years 65 65Long-term insured 35 years 65 63Women 15 years 65 60Unemployed 15 years 65 60Disability 35 years 63 60
Source : Seibold (2017), Tab. 1.
93 / 112
Figure 54 – Job Exit Age Distribution in Germany
Source : Seibold (2017), Fig. 1.
94 / 112
Figure 55 – Evolution of FRA in Germany
Source : Seibold (2017), Fig. 3.B.
95 / 112
III. Impact of pensions on retirementNorms, reference point• Bunching method
• Measuring the bunching mass B at age R compared tocounterfactual density h0(R) gives the excess mass b
b =B
h0(R)
• Elasticity of retirement age w.r.t. the net-of-tax rate ε
b/R
∆τ/(1− τ)
• Bunching with frictions and statutory ages• Note xi obs. var. and Ds
i dummy for statutory age at i
Bi = B(ε,Dsi , xi )
• Idea is to use different statutory ages, to uncover structuralelasticities ε from frictions or statutory age effects
96 / 112
Figure 56 – Statutory age vs. pure financial incentive notch
Source : Seibold (2017), Fig. 4.A.
• ERA at age 60 for women born in 1945-46, ε = 4.45
• 15 years contribution notch, ε = 0.12
97 / 112
Figure 57 – Kinks in Disability vs. Invalidity Pathways
Source : Seibold (2017), Fig. 4.B.
• FRA at age 63 for disabled born in 1945-46, ε = 0.67
• Kinks at age 63 for invalidity due to financial adjustment ofpension (not statutory age), ε = 0.006
98 / 112
Figure 58 – Excess Mass from Bunching at Statutory Age
Source : Seibold (2017), Fig. 5.A.
99 / 112
Figure 59 – Excess Mass from Bunching at financial incentiveskinks
Source : Seibold (2017), Fig. 5.B.
100 / 112
III. Impact of pensions on retirementNorms, reference point
• Reduced-form estimation• Regression of bunching on financial incentives and
statutory ages
bi
Ri
= ε∆τi
1− τi+∑s
βsDsi + γZi + νi
• Observation i corresponds to each discontinuity• βs measures additional bunching for each statutory age
• Results• NRA has largest effect on bunching : βNRA = 0.8• FRA has largest effect on bunching : βFRA = 0.3• ERA has largest effect on bunching : βERA = 0.2• Elasticity ε = 0.1
101 / 112
IV. Unemployment and pensions
1 Early retirement policies
2 Impact on older workers’ employment
3 Impact on unemployment
102 / 112
IV. Unemployment and pensionsEarly retirement policies
• Lump of labour idea• Unemployment is caused by excess labour supply• If older workers (women, immigrants) leave the labour
force, they “release” jobs for the unemployed• Very popular idea
• Early retirement policies in Europe• 1970s oil shock, increase in unemployment• Development of early retirement schemes in many
countries (France, Netherlands, Belgium, UK)
103 / 112
IV. Unemployment and pensionsEarly retirement policies
• Early retirement in France• 1972 garanties de ressources : age 60-64• 1977 garanties de ressources demission : : age 60-64• 1981 contrat de solidarite : age 55-60• 1983 reform to lower effective retirement age at 60• 1983 Removal of the incentive to delay retirement
• Large support• Across party support
“Que ceux qui sont les plus ages, que ceux qui onttravaille, partent, fassent la place aux jeunes pour que toutle monde ait du travail.”
Pierre Mauroy, French Prime Minister, 1981• Employer and employee unions
104 / 112
Figure 60 – Development of early retirement schemes in France
0
500
1000
1500
2000
2500
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Mill
iers
Growth of the program (SS and other schemes)
60-64 ans 55-59 ans DRE 55-59 ans
Retired aged 60-64
DRE: Unemployed exempted from job search
Early retirees aged 55-59
Early retirees aged 60-64
Source : Ben Salem, Blanchet, Bozio and Roger (2010), Fig. .
105 / 112
IV. Unemployment and pensionsEarly retirement policies
• Evaluation• Little evaluation at the time (assumption that 1 for 1
reduction in unemployment)• Gruber and Wise (2010) : country case studies• France : Ben Salem et al. (2010)• UK : Job Release Scheme (Banks et al. ,2010)• Denmark : very sharp introduction of early retirement
scheme in 1979
• Results• Very significant negative effect on older worker’s
employment• No effect detected on youth unemployment or employment
106 / 112
IV. Unemployment and pensionsEarly retirement policies
• Cross-country evidence• Diamond (2006) using Gruber and Wise (1999)• Gruber, Milligan and Wise (2010)
• Results• No correlation between tax incentives and unemployment
• Mechanisms ?• Not well understood• Bozio (2006) suggest labour market modelling with impact
of early retirement funding on labour cost of youngerworkers
107 / 112
Figure 61 – Tax on postponing activity vs labour forceparticipation
Source : Diamond (2006), based on Gruber and Wise (1999).
108 / 112
Figure 62 – Tax on postponing activity vs unemployment
Source : Diamond (2006), based on Gruber and Wise (1999).
109 / 112
References (1/3)
– Baker, Michael, and Dwayne Benjamin (1999), “Early Retirement Provisions and the Labor Force Behavior ofOlder Men : Evidence from Canada”. Journal of Labor Economics 17 (4) : 724-56.
– Behaghel, Luc, and David M. Blau (2012), “Framing Social Security Reform : Behavioral Responses toChanges in the Full Retirement Age”. American Economic Journal : Economic Policy 4 (4) : 41-67.
– Blau, David M. (1994), “Labor Force Dynamics of Older Men”. Econometrica 62 (1) : 117-56.
– Blundell, Richard, Costas Meghir and Sarah Smith (2002), “Pension Incentives and the Pattern of EarlyRetirement”. The Economic Journal 112 (478) : C153-70.
– Blundell, Richard, Antoine Bozio and Guy Laroque (2011), “Labor Supply and the Extensive Margin”, TheAmerican Economic Review 101, no. 3 : 482-86.
– Blundell, Richard, Antoine Bozio and Guy Laroque (2013), “Extensive and Intensive Margins of LabourSupply : Work and Working Hours in the US, the UK and France”, Fiscal Studies 34, no. 1 : 1-29.
– Boskin, Michael J., and Michael D. Hurd (1977), “The Effect of Social Security on Early Retirement”.National Bureau of Economic Research Cambridge, Mass., USA.
– Bozio, Antoine (2008), “How Elastic is the Response of the Retirement-Age Labor Supply ?”, in PensionStrategies in Europe and the United States, Robert Fenge, Georges de Menil, and Pierre Pestieau (eds) CESifoSeminar series. MIT Press.
– Bozio, Antoine (2011) “La reforme des retraites de 1993 : l’impact de l’augmentation de la duree
d’assurance”. Economie et Statistique 441 (1) : 39-53.
– Burkhauser, Richard V., and Joseph F. Quinn (1983), “Is Mandatory Retirement Overrated ? Evidence fromthe 1970s”. The Journal of Human Resources 18 (3) : 337-58.
– Burtless, Gary (1986), “Social Security, Unanticipated Benefit Increases, and the Timing of Retirement”. TheReview of Economic Studies 53 (5) : 781-805.
110 / 112
References (2/3)– Coile, Courtney, and Jonathan Gruber (2007), “Future Social Security Entitlements and the Retirement
Decision”. The Review of Economics and Statistics 89 (2) : 234-46.
– Costa, Dora L. (1998), The evolution of retirement : an American economic history, 1880-1990. NBER serieson long-term factors in economic development. Chicago : University of Chicago Press.
– Cribb, Jonathan, Carl Emmerson, and Gemma Tetlow (2013), “Incentives, Shocks or Signals : Labour SupplyEffects of Increasing the Female State Pension Age in the UK”. IFS Working Papers.
– Diamond, P. (2006) “Systeme de retraite et vieillissement de la population”, Revue francaise d’economie 20(4), pp. 21–49.
– Disney, Richard (2004) “Are Contributions to Public Pension Programmes a Tax on Employment ?” EconomicPolicy 19 (39) : 268-311.
– French, Eric (2005), “The Effects of Health, Wealth, and Wages on Labour Supply and RetirementBehaviour”. The Review of Economic Studies 72 (2) : 395-427.
– Friedberg, L. (2000), “The Labor Supply Effects of the Social Security Earnings Test”. Review of Economicsand Statistics 82 (1), pp. 48-63.
– Gelber, A., Jones, D. and Sacks, D. (2015) “Earnings Adjustment Frictions : Evidence from the Social SecurityEarnings Test”, NBER Working Paper No. 19491.
– Gelber, A., Jones, D. and Sacks, D. (2020a) “Estimating Earnings Adjustment Frictions : Method andEvidence from the Earnings Test”, American Economic Journal : Applied Economics, 12(1), 1–31.
– Gelber, A., Jones, D. Sacks, D. and Song, J. (2020b) “The Employment Effects of the Social SecurityEarnings Test”, forthcoming, Journal of Human Resources.
– Gruber, J. and Wise, D. (1998) “Social Security and Retirement : An International Comparison”, AmericanEconomic Review, pp. 158–63.
– Gustman, A. and Steinmeier, T. (1986) “A Structural Retirement Model”, Econometrica 54, no. 3, pp. 555–84.
– Hurd, M. (1990) “Research on the Elderly : Economic Status, Retirement, and Consumption and Saving”,Journal of Economic Literature 28 (2), pp. 565–637.
111 / 112
References (3/3)– Hurd, M. and Boskin, M. (1984) “The Effect of Social Security on Retirement in the Early 1970s”, The
Quarterly Journal of Economics 99 (4) : 767-90.
– Krueger, Alan B., and Jorn-Steffen Pischke (1992), “The Effect of Social Security on Labor Supply : A CohortAnalysis of the Notch Generation”. Journal of Labor Economics 10 (4) : 412–37.
– Lazear, Edward P. (1986), “Retirement from the Labor Force”. In Handbook of Labor Economics, edited byOrley Ashenfelter and David Card, 1 :305-55. Chap. 5. Elsevier.
– Lumsdaine, Robin L., and Olivia S. Mitchell (1999), “New Developments in the Economic Analysis ofRetirement”. In Handbook of Labor Economics, edited by Orley Ashenfelter and David Card, 3, PartC :3261-3307. chap. 49. Elsevier.
– Mahieu, Ronan, and Beatrice Sedillot (2000), “Microsimulations of the Retirement Decision : A Supply-SideApproach”. Working Paper Insee.
– Manoli, D. and Weber, A. (2016) “Nonparametric Evidence on the Effects of Financial Incentives onRetirement Decisions”, American Economic Journal : Economic Policy, Vol. 8, No. 4, pp. 160–82.
– Manoli, D. and Weber, A. (2018) “The Effects of the Early Retirement Age on Retirement Decisions”, workingpaper.
– Ruhm, C. (1995), “Secular Changes in the Work and Retirement Patterns of Older Men”. The Journal ofHuman Resources 30 (2) : 362-85.
– Rust, J., and Phelan, C. (1997), “How Social Security and Medicare Affect Retirement Behavior In a World ofIncomplete Markets”. Econometrica 65 (4) : 781-831.
– Samwick, A. (1998), “New Evidence on Pensions, Social Security, and the Timing of Retirement”. Journal ofPublic Economics 70 (2) : 207-36.
– Schirle, Tammy. (2008), “Why Have the Labor Force Participation Rates of Older Men Increased since theMid-1990s ?” Journal of Labor Economics 26 (4) : 549-94.
– Seibold, A. (2017) “Reference Dependence in Retirement Behavior : Evidence from German PensionDiscontinuities”, working paper.
– Stock, James H. and David A. Wise. (1990), “Pensions, the Option Value of Work, and Retirement”.Econometrica 58 (5) : 1151-80.
112 / 112