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Effect of Pensions and Disability Benefits on Retirement in the UK

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  • James Banks
  • Carl Emmerson
  • Gemma C. Tetlow

Abstract

This paper examines to what extent differences in employment rates across those in better and worse health in the UK can be explained by the availability of publicly-funded disability insurance and the financial incentives provided by other retirement income schemes. Using an option value approach, we find that individuals’ labor force participation is affected by financial incentives. A one standard deviation change in the option value is estimated to reduce the likelihood of an individual leaving the labor market in the next year by between 2.7 and 3.1 percentage points, relative to an average exit probability of 9.4%. This suggests the variation in financial incentives across different individuals could explain a significant proportion of retirements. However, we find no evidence that individuals with different levels of health respond to our measure of financial incentives differently. We also conclude that it would require a very large change in the stringency of the disability insurance program on its own to generate an economically significant change in overall employment rates of older workers in the UK. This reflects the fact that – for many individuals in the UK – the level of disability benefits they might be able to receive is low relative to the amount they could earn and, therefore, large changes in rates of eligibility would not induce large changes in overall employment rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19907.

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Date of creation: Feb 2014
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Publication status: Forthcoming: Effect of Pensions and Disability Benefits on Retirement in the UK , James Banks, Carl Emmerson, Gemma Tetlow. in Social Security Programs and Retirement Around the World: Disability Insurance Programs and Retirement , Wise. 2014
Handle: RePEc:nbr:nberwo:19907

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  1. David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, June.
  2. 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.
  3. Michael Anyadike-Danes & Duncan McVicar, 2008. "Has the Boom in Incapacity Benefit Claimant Numbers Passed Its Peak?," Fiscal Studies, Institute for Fiscal Studies, vol. 29(4), pages 415-434, December.
  4. James M. Poterba & Steven F. Venti & David A. Wise, 2013. "Health, Education, and the Post-Retirement Evolution of Household Assets," NBER Working Papers 18695, National Bureau of Economic Research, Inc.
  5. Jonathan Cribb & Carl Emmerson & Gemma Tetlow, 2013. "Incentives, shocks or signals: labour supply effects of increasing the female state pension age in the UK," IFS Working Papers W13/03, Institute for Fiscal Studies.
  6. Richard Disney & Carl Emmerson, 2005. "Public pension reform in the United Kingdom: what effect on the financial well-being of current and future pensioners?," Fiscal Studies, Institute for Fiscal Studies, vol. 26(1), pages 55-81, March.
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