Early retirement schemes (2)

1. Simulation • Using the estimation results we have simulated the distribution of the retirement age for the VUT, the transitional and the prepension scheme (see graph). • Calculation of the average retirement age under the different schemes shows that the transitional scheme has induced individuals to postpone retirement by on average 8 months. Under the prepension scheme a further increase of this difference to 11 months can be expected. Early Retirement Behaviour in the Netherlands Evidence from a Policy Reform Abstract The Dutch labor force participation rate of elderly is among the lowest of Europe and early retirement schemes play an important role. Already in the early 1990s, unions and employer organizations recognized the adverse incentive effects of the generous and actuarially unfair PAYG schemes and decided to transform these to less generous and actuarially fair capital funded schemes. The starting dates of the transitional arrangements varied by sector. In this study, we exploit the variation in starting dates to estimate the impact of the policy reform on early retirement behavior. We use a large administrative dataset, the Dutch Income Panel of the National Tax Office, to estimate hazard rate models for early retirement. We conclude that the policy reform induces workers to postpone early retirement. Model simulations show that the transitional scheme has already led to average retirement postponement by 8 months, which will become almost a year once the transition is completed. Data & Model In the empirical analysis we use the Income Panel data set (IPO) of Statistics Netherlands. This data set is based on administrative data from the Dutch National Tax Office and concerns the period 1989 – 2000. The data set has a panel structure and contains information about 75 thousand individuals. We only consider the individuals aged between 55 and 65, which are participant in one of the selected pension funds and which are not left-censored. This results in a sample of 2973 individuals. To estimate the effect of the transition to a prepension scheme, we use a duration model. The duration of an individual is defined as the time that elapses between his 55th birthday and his moment of retirement. We assume a mixed proportional hazard form and we estimate both the baseline hazard and the unobserved heterogeneity nonparametrically. A actuarially fair prepension scheme does not provide incentives to retire at specific ages. A VUT scheme however provided two different incentives: an incentive to postpone retirement to individuals younger than the standard retirement age and an incentive to retire to individuals older than the standard retirement age. Therefore, we use two dummy variables to model the effect of the transition from VUT to prepension: incentive to wait and incentive to retire. Early retirement schemes (1) The first early retirement scheme in the Netherlands was introduced in the late seventies and was called the VUT scheme. The exact conditions of this scheme varied by sector, but a typical scheme provided a benefit from age 60 until 65 that was equal to 80% of the last earned wage. This replacement rate did not increase if retirement was postponed, so the scheme was not actuarially fair. Results The table on the right shows the estimation results for the baseline hazard and the two dummy variables. Incentive to retire is significantly positive, which means that individuals aged 60 and over had a higher hazard rate in the VUT scheme than in the prepension scheme. On the other hand, incentive to wait is not significant, implying that the transition had no effect on individuals aged between 55 and 60. Specifications with a double baseline (one for the VUT scheme and one for the transitional scheme) or with financial variables like the pension wealth, the peak value and the option value were also estimated, but the performance of these models was less. The VUT scheme was financed by a pay-as-you-go (PAYG) system, which implied that its sustainability was threatened by the ageing of the Dutch population. Because of this, unions and employer organizations decided to transform the schemes to capital funded schemes, the so-called prepension schemes. These schemes are less generous: the standard retirement age is higher and the replacement rate is lower (see figures). Early retirement schemes (2) To spare older workers, the pension funds introduced transitional schemes in which the replacement rate depended on the date of birth. The moment of introduction and the exact conditions varied by sector. The table below shows the replacement rates in the VUT scheme, the transitional scheme and the prepension scheme for ABP, the pension fund of the government. Note that the VUT scheme provided a clear incentive to retire at age 60, whereas the prepension scheme is actuarially fair. A similar table is available for six other pension funds, which did not introduce a prepension scheme during the period of investigation. We use the participants of these pension funds as a control group. Rob Euwals (CPB, IZA, CEPR), Daniel van Vuuren (CPB, VU University Amsterdam), Ronald Wolthoff (Tinbergen Institute, VU University Amsterdam),wolthoff@tinbergen.nl