Pension incentives to retire

Edward Whitehouse

Slovenia, June 2007

Agenda

When can people retire? Retirement incentives Sensitivity analysis Policy implications

Normal pension age

55 56 57 58 59 60 61 62 63 64 65 66 67FRAMLTSVKHUNESTCZELATLIT

SVNPRTGRCLUXJPNITA

BELSWEESPFIN

AUTDEUCYPPOLNLDIRL

GBRDNKUSA

Pension eligibility agefor men

Normal pension age

55 56 57 58 59 60 61 62 63 64 65 66 67FRAMLTSVKHUNESTCZELATLIT

SVNPRTGRCLUXJPNITA

BELSWEESPFIN

AUTDEUCYPPOLNLDIRL

GBRDNKUSA

Pension eligibility agefor men

Normal pension age: women

55 56 57 58 59 60 61 62 63 64 65 66 67FRAMLTSVKHUNESTCZELATLITSVNPRTGRCLUXJPNITABELSWEESPFINAUTDEUCYPPOLNLDIRLGBRDNKUSA

Pension eligibility agefor women

Retirement windows

55 56 57 58 59 60 61 62 63 64 65 66 67FRAMLTSVKHUNESTCZELATLIT

SVNPRTGRCLUXJPNITA

BELSWEESPFIN

AUTDEUCYPPOLNLDIRL

GBRDNKUSA

Pension eligibility age(early/normal) for men

Retirement duration

10 12.5 15 17.5 20 22.5 25 27.5 30FRAMLTSVKHUNESTCZELATLIT

SVNPRTGRCLUXJPNITA

BELSWEESPFIN

AUTDEUCYPPOLNLDIRL

GBRDNKUSA Average: 17.7 years

Additional life expectancy at normal pension age, men, 2004 Eurostat data

Retirement duration: men, 2004

10 12.5 15 17.5 20 22.5 25 27.5 30FRAMLTSVKHUNESTCZELATLIT

SVNPRTGRCLUXJPNITA

BELSWEESPFIN

AUTDEUCYPPOLNLDIRL

GBRDNKUSA Average: 19.9 years

Additional life expectancy at normal and early pension ages, men, 2004 Eurostat data

Measuring incentives to retire

Relationship between incomes in and out of work: out of work: retirement pension in work: earnings ratio of the two is the conventional ‘replacement rate’

But extra work can give extra pension entitlement Captured by the ‘change in pension wealth’ from

working longer pension wealth is present value of future pension receipts an implicit tax/subsidy on remaining in work

Level of pension wealth also matters Focus on age 60-64

Change in pension wealthAge 60-64, average earner, entry at 25

-50

-25

0

25

50

LUXHUN

NLDESP

POLAUT

FINDEU

CZEJPN

ESTDNK

SVKGBR

IRLLAT

FRAITA

SVNLIT

CYPUSA

PRTSWE

BELGRC

MLT

Annualised;per cent of annual earnings

Level of pension wealthAge 60, average earner, entry at 25

0

5

10

15

20

GBRJPN

IRLUSA

POLLIT

DEULAT

SVKEST

BELFIN

CZEFRA

SWECYP

DNKITA

AUTHUN

PRTSVN

NLDESP

LUXGRC

MLT

Pension wealth at age 60, multiple of annual earnings

Pension wealth: changes and levels

Change in pension wealth, working age 60-64 Lowest third Middle third Highest third

Lowest Lithuania, United States

Ireland, Japan, Latvia, Slovakia, UK

Germany, Poland

Middle Belgium, Cyprus, Sweden

Denmark, Estonia, France, Italy

Czech Republic Finland

Leve

l of p

ensi

on w

ealth

at

age

60

Highest Greece, Malta, Portugal, Slovenia

Austria, Hungary, Luxembourg, Netherlands, Spain

Conclusions – incentives Early retirement permitted with low (e.g. Hungary, Portugal) or zero

(e.g. Belgium, Greece, Luxembourg) reduction in benefits Zero or too small increments for people deferring retirement

(e.g. France, Slovenia, Spain)

Earnings tests that prevent people combining work and pension (e.g. Belgium, Ireland, Malta, Luxembourg)

Systems that require contributions even when little or no extra benefit is earned (e.g. maximum number of years in Belgium, Greece, Spain, United States)

Resource tests can encourage retirement at earliest opportunity for low earners (e.g. France, Portugal, Sweden)

Benefit formulae with higher pension accruals at younger ages (e.g. Spain) or pensions based of ‘final’ or ‘best’ earnings, which encourage people to retire once pay has peaked (e.g. Greece, Spain)

Contact information

Edward Whitehouse +33 1 45 24 80 79 edward.whitehouse@oecd.org

ELS/SPDOECD2 rue Andre PascalParis 75775 Cedex 16France

Internet: www.oecd.org/social/ageing/PaG