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The effect of pension rules on retirement monetary incentives with an application to pension reforms in Spain

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  • Sergi Jiménez-Martín

    ()
    (Universitat Pompeu Fabra)

  • Alfonso R. Sánchez Martín

    ()
    (Imperial College London)

Abstract

In this work we theoretically disentangle the effects of pension provisions on a variety of financial incentives to retirement, trying to reconcile them with some key Spanish retirement patterns. We find that the «average» individual, who is never affected by any cap of contributions or benefits, has weak incentives to retire early and strong incentives to retire at the normal retirement age. Alternatively, individuals at the bottom of the wage distribution have strong incentives to retire as early as possible, as a result of the interaction between age-related penalties and the minimum pension. Both findings perfectly accommodate the retirement hazard of medium and low earners respectively. In contrast, high earners (those that have their contributions capped) do not retire early despite having strong incentives to do so. This is because, for those workers, financial incentives are not a good proxy for the marginal utility from working. Finally, we analyze the reasons behind the failure of the 1997 reform in improving the sustainability of the Spanish public pension system.

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Bibliographic Info

Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 169 (2004)
Issue (Month): 2 (June)
Pages: 35-66

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Handle: RePEc:hpe:journl:y:2004:v:169:i:2:p:35-66

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Keywords: retirement; Social Security; Monetary incentives; Pension Reform; Spain;

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  1. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  2. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
  3. Michele Boldrin & Sergi Jimenez-Martni & Franco Peracchi, 1997. "Social Security and Retirement in Spain," NBER Working Papers 6136, National Bureau of Economic Research, Inc.
  4. Michele Boldrin & Sergi Jiménez-Martín & Franco Peracchi, 2004. "Micro-Modeling of Retirement Behavior in Spain," NBER Chapters, in: Social Security Programs and Retirement around the World: Micro-Estimation, pages 499-578 National Bureau of Economic Research, Inc.
  5. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, July.
  6. Samwick, Andrew A., 1998. "New evidence on pensions, social security, and the timing of retirement," Journal of Public Economics, Elsevier, vol. 70(2), pages 207-236, November.
  7. Juan Carlos Conesa & Carlos Garriga, 2001. "Sistema Fiscal y Reforma de la Seguridad Social," Working Papers in Economics 67, Universitat de Barcelona. Espai de Recerca en Economia.
  8. Edward P. Lazear, 1974. "Age, Experience and Wage Growth," NBER Working Papers 0051, National Bureau of Economic Research, Inc.
  9. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-80, September.
  10. Borsch-Supan, Axel, 2000. "Incentive effects of social security on labor force participation: evidence in Germany and across Europe," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 25-49, October.
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