Spousal Joint Retirement: A reform based approach to identifying spillover effects

1. Spousal Joint Retirement: A reform based approach to identifying spillover effects Francois Gerard, Department of Economics, UC Berkeley and Lena Nekby, Department of Economics, Stockholm University and SULCIS

2. Introduction • Recent pension reforms aim at raising retirement ages by strengthening work incentives for the elderly. • How current and future reforms will affect the labor supply of the elderly is thus a central question of interest for policymakers. • Retirement decisions, at least within couples, are highly interdependent. • Coile (2003) estimates that omitting spousal retirement incentives significantly underestimates the overall impact of typical reforms by 13% to 20%.

3. Introduction • Joint retirement accounts for nearly a third of retirement patterns in the US and Europe (Blau, 1998; Coile, 2003; Hurd, 1990; Pozzoli and Ranzani, 2009). • Blau: Between 11% -16% of couples exit the labor force in the same quarter and between 30%-41% within 1 year of each other (Retirement History Survey RHS). • Pozzoli & Ranzani: In Europe (SHARE data 2004) 78% ofworking males aremarried and 24% have a workingwife. • participation rate of women aged 50-64 is 65% or higher in Denmark, Finland, Norway, Sweden

4. Introduction • Questions to answer: • Are there spillover effects of the reform on own retirement due to changes in spousal retirement incentives? • Can we use the reform to quantify the causal effect of spousal retirement on own retirement? • The literature to date has not been able to clearly identify the impact of a partner’s retirement decision on one's own decision so the question remains unanswered

5. Introduction • Spillover effects on individual retirement decision may be due to • income effects (cross-earnings effects, cross-health effects) • joint assets, joint wealth • complementarity (or substitution) of leisure between spouses • correlation in preferences – assortative mating • correlation in pension incentives

6. Introduction • Many studies find significant and economically relevant correlations between individual retirement decisions and partner’s incentives (An et al, 1999; Blau, 1998; Coile, 2003; Johnson and Favreault, 2001; Zweimuller et al., 1998). • These studies lack a clear identification strategy. • Another strand in the literature estimates structural models of retirement behavior within couples (Hurd, 1990; Gustman and Steinmeier, 2000; Maestas, 2002)

7. Coile (2003): Men are very responsive to their wives‘ pension incentives but women are not responsive to their husbands' incentives. • Husbands react to changes in wives’ legal minimum retirement age, wives don’t react vice versa (Zweimuller et al 1995) • An et. al. (1999) finds strong complementarities in leisure times, symmetrically for husband and wife. • Neither party is found likely to substitute own for purchased care when the spouse is in poor health. • Johnson & Favreault (2001): Both men and women are less likely to retire if spouses have left labor market due to health reasons. • Blau (1998):high incidence of joint retirement, which cannot be explained by financial incentives • preferences for sharing leisure has important implications for analysis of the effects of retirement policy.

8. Pozzoli & Ranzani (2009): joint retirement is significantly correlated with education, age, and health status, together with partner's employment status, partner's education and partner's health status. • females are more likely to take care of their sick partners, and retire earlier, whereas husbands do not. • Gustman & Steinmeier (2000): Interaction between spouses modeled as a non-cooperative game • correlation of retirement preferences important for joint retirement as is the increase in leisure value from having a spouse retired. • Maestas (2002): lifecycle model with cooperative bargaining • Complementarity in leisureimportant • Women chose toretireearlybecausetheywantto, not becausetheir husbands wantthemto.

9. Recent work exploits exogenous changes from pension reforms to estimate causally the impact of own retirement incentives on own retirement behavior (Glans 2008; Mastrobuoni, 2009). • Ourstudyextendsthisworkto spillovers withincouples

10. Recent paper by Selin (2011) looks at same questionusing same reform! • Looks only at malereactionstochanges in retirementincentivesamongfemalespouses • Looks only at men marriedtowomenaged 63 • Has onlyonereferenceyear • wifesaged 63 in the year 2000 whothereforebelongto the last cohort (1937) unaffected by the reform • Onlyone (generous) definition ofretirement • postive pension income

11. The 2000 Pension Reform • The 2000 pension reform introduced a defined contribution system in comparison to the old defined benefit system • The new national pension system consists of three parts; income pension (Notional Defined Contribution), premium pension and guarantee pension • plus occupation-based and private pensions. • Contributions to income pensions are recorded in individual accounts which represent individual claims to future pension benefits. • Annual contributions to the NDC are used to finance current pension benefit obligations as in a pay-as-you-go system.

12. The 2000 Pension Reform increased work incentives • Income and premium pension are based on lifetime earnings including pensionable income from sickness benefits, parental leave, unemployment insurance, studies (with national student loans) and military service. • Pensions can be withdrawn at the earliest from age 61 but pensions are reduced until the age of 65 at which time they are adjusted back to regular levels. • There is no upper age limit for commencing pension payments (in previous system, work after age 70 did not lead to higher pensions). • In the new system, pensions are higher the later they are withdrawn due to a lower number of years with expected pension payments and higher lifetime contributions.

13. Old System • Folkpension (independent ofpreviousincome) and supplementary benefit (ATP): ATP = 0.60*BPA*ATP points ATP points = (pensionableincome-BPA)/BPA (BPA=36,600 SEK in year 2000) • ATP pointsearnedduring 15 highestyearsofincomesince age 16 (or average over availableyears) • Pensions could be withdrawn from beginningof the month an individualturns 61 (with a permanent reduction by 0.5% for eachmonthleftuntil age 65 • Postponementpossibleuntil age 70 (with 0.7 percent permanent increase for eachpostponedmonth)

14. Distribution of pension across new (orange) and old (grey) system by cohort

15. Two approaches: • Graph actual and simulated retirement and joint retirement behavior under various assumptions in order to see how much of actual behavior can be explained by the average behavior of individuals (in a given cohort, sector etc) • Difference-in-difference & triple difference analyses of reform effect • Compare cohorts affected by the reform with those not affected by the reform before and after the reform kicks in (2000). • Given treatment effect on own retirement behavior, estimate treatment effect of having a spouse affected by the reform in comparison to having a spouse not affected by the reform before and after the reform kicks in.

16. Difference-in-difference strategy (and triple difference) • Also use the fact that local public sector workers simultaneously experienced a reform of occupational pensions towards a defined contribution system (enhancing the effect of the general pension reform in comparison to private sector workers). • Use reform to instrument effect of spousal retirement on own retirement, focusing only on those not directly affected by the reform (?)

17. Data • IFAU database • Information on all individuals aged 16-65 from 1985-2000 and all individuals aged 16-74 from 2001-2007 • Information on employment, sector, income, education from 1985 • Information on various sources of pension income from 1990: early retirement, folkpension, ATP, disability pensions (old system) and income pension, premium pension, occupational pensions (aggregated), guarantee pension (new system)

18. Restrictions • Couples who have the same spouse throughout the observation period • Depart from LOUISE data (1990-2008) • Keep only cohorts born 1930-1950 • Missing are couples where: • one spouse falls outside LOUISE age range • dies during the observation period • Family identification is missing • No match between LOUISE and Employment (Sys) data • 54% of over 3 million individuals observed are with same spouse throughout the observation period • 24% constantly single • 18% change spouse • 4% ?

19. Defining Retirement • Four definitions ofretirement: • No work: incomeequaltozero • Some pension: sumof all pension sourcesgreaterthanzero • More pension: sumofincome plus sick benefits less thansumof pension income • Permanent drop: Permanent drop in income (including sick benefits) of at least 33% from oneyearto the next • Thismeasure (& no work) can be measured from 1985 • Today focus on ”dropincome” and ”some pension”

20. Defining sector of employment • No direct information on occupational pensions available • Two definitions (based on data from 1985-2008) offourdefinedsectors: • State, County, Municipality, Other (Private Swedish, Private Foreign) • Sectorwithmajorityof observations before the age of 60 • Sectorwith maximum incomebefore the age of 60

21. Panel 1985-2008 of individuals and their spouses born 1934-1941

22. Own retirment by cohort & sector

26. Joint Retirement: Females

27. Joint Retirement: Males

28. Joint Retirement: Females (incl. Sector)

29. Joint Retirement: Males (incl. Sector)

30. Joint Retirement, Same Year

31. Joint retirement within one year: some pension definition

32. Probability of retirement X years apart:

33. Difference in difference estimation of reform effect (change in own pension incentives) on retirement probability (treatment= birth year>1937, post= year>2000)

34. Difference in difference estimation of reform effect on pension probability (birth year*post interactions, reference year = 1930)

35. Triple difference estimation of direct reform effect on retirement

36. Triple difference estimation of reform effect (birth year*local public sector*post)

37. OLS Estimation of Spousal Retirement on Individual Retirement

38. Triple difference estimation of SPOUSAL reform effect on retirement probabilities (given own reform effect)

39. Triple difference estimation of SPOUSAL reform effect on retirement probabilities (spouse birth year*spouse local public sector*post)

41. If we want to use reform as an instrument for spousal retirement, need to drop those directly affected by the reform (cohorts born after 1937)

42. Triple difference estimation of SPOUSAL reform effect on retirement probabilities, Individuals born on or before 1937 only:

43. Original idea was to quantify the effect of spousal retirement on own retirement by IV ”If you can’t see the the causal relation of interest in the reduced form, it’s probably not there” -Angrist and Krueger (2001)

44. IV estimation of spousal retirement: • There is a first stage effect of reform on spousal retirement (corr (retirement_s, reform_s)>0) • Female spouses affected by the reform (triple difference) decrease retirement probabilities by approx. 5.0 percentage points in comparison to female spouses not affected by the reform • Likewise reform effect on male spouses is - 8.0 pp. • No reduced form effect of spousal reform on own retirement probabilities (corr (retirement_i, reform_s)=0) • Spousal (local public sector reform effect of female (male) spouses on male (female) retirement is -0.4 (0.9) percentage points and not signficant.

45. Conclusions • Are there spillover effects of the reform on own retirement due to changes in spousal retirement incentives? • Yes, something seems to be happening for those with spouses born after 1940 • Spill-over effect of reform is likely to work via spousal retirement but... • can’t as of now use the reform as an instrument to quantify the causal effect of spousal retirement on own retirement.