Labor supply and fiscal effects of partial retirement – The role of entry age and the timing of pension benefits

In recent years policy-makers are incentivizing later retirement entry by enabling flexible transitions into retirement through partial retirement. However, empirical evidence shows that the labor supply and related fiscal effects of more flexibility in the pension system, through partial retirement, are ambiguous and strongly depend on the design of partial retirement regimes. Two margins are in particular important: (1) the entry age into partial retirement programs; and (2) the timing of pension benefits in partial retirement prior to full retirement. Based on administrative data from Germany this paper analyzes how variations in these two margins affect labor supply and fiscal balances. For the empirical analysis we use a dynamic structural retirement model. Our results show that partial retirement can lead to positive labor supply effects (an increase of up to 3.4% in employment volume) if the partial retirement entry age is equal to the early retirement age. A partial retirement scheme that combines earnings from part-time employment with partial pensions and an entry age that is equal to the early retirement age yields positive financial effects for both individuals and institutions. Thus, reducing the access constraints to partial retirement from the early retirement age onwards can be an important policy to meet the challenges of demographic change.