IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp1679.html
   My bibliography  Save this paper

The Effect of Partial Retirement on Labor Supply, Public Balances and the Income Distribution: Evidence from a Structural Analysis

Author

Listed:
  • Songül Tolan

Abstract

This paper develops a structural dynamic retirement model to investigate effects and corresponding underlying mechanisms of a partial retirement program on labor supply, fiscal balances, and the pension income distribution. The structural approach allows for disentangling the two counteracting mechanisms that drive the employment effects of partial retirement: 1) the crowding-out from full-time employment, and 2) the movement from early retirement or unemployment to partial retirement. It also allows for investigating the role of financial compensations in a partial retirement program. Based on a unique German administrative dataset, I perform counterfactual policy simulations that analyze the role of partial retirement combined with financial subsidies and an increased normal retirement age. The results show that partial retirement extends working lives but reduces the overall employment volume. The fiscal consequences of partial retirement are negative but substantially less so when wages and pensions in partial retirement remain uncompensated. Partial retirement decreases inequality in pension income and provides a way to smooth consumption especially for retirees in lower income deciles in the context of an increased normal retirement age.

Suggested Citation

  • Songül Tolan, 2017. "The Effect of Partial Retirement on Labor Supply, Public Balances and the Income Distribution: Evidence from a Structural Analysis," Discussion Papers of DIW Berlin 1679, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1679
    as

    Download full text from publisher

    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.563505.de/dp1679.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Day Manoli & Kathleen J. Mullen & Mathis Wagner, 2015. "Policy Variation, Labor Supply Elasticities, And A Structural Model Of Retirement," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1702-1717, October.
    2. Lukas Inderbitzin & Stefan Staubli & Josef Zweimüller, 2016. "Extended Unemployment Benefits and Early Retirement: Program Complementarity and Program Substitution," American Economic Journal: Economic Policy, American Economic Association, vol. 8(1), pages 253-288, February.
    3. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
    4. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    5. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    6. Haan, Peter & Prowse, Victoria L., 2015. "Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings," IZA Discussion Papers 8980, Institute of Labor Economics (IZA).
    7. Donna B. Gilleskie & David M. Blau, 2006. "Health insurance and retirement of married couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 935-953.
    8. Andrea Albanese & Bart Cockx & Yannick Thuy, 2020. "Working time reductions at the end of the career: Do they prolong the time spent in employment?," Empirical Economics, Springer, vol. 59(1), pages 99-141, July.
    9. Alan L. Gustman & Thomas L. Steinmeier, 2008. "Projecting behavioral responses to the next generation of retirement policies," Research in Labor Economics, in: Solomon W. Polachek & Konstantinos Tatsiramos (ed.), Work, Earnings and Other Aspects of the Employment Relation, volume 28, pages 141-195, Emerald Publishing Ltd.
    10. Timm Bönke & Giacomo Corneo & Holger Lüthen, 2015. "Lifetime Earnings Inequality in Germany," Journal of Labor Economics, University of Chicago Press, vol. 33(1), pages 171-208.
    11. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
    12. Arthur Van Soest & Arie Kapteyn & Julie Zissimopoulos, 2006. "Using Stated Preferences Data to Analyze Preferences for Full and Partial Retirement," Working Papers WR-345, RAND Corporation.
    13. C Machado & Miguel Portela, 2014. "Hours of work and retirement behaviour," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-22, December.
    14. Xiaoyan Li & Nicole Maestas, 2008. "Does the Rise in the Full Retirement Age Encourage Disability Benefits Applications? Evidence from the Health and Retirement Study," Working Papers wp198, University of Michigan, Michigan Retirement Research Center.
    15. Johannes Geyer & Clara Welteke, 2017. "Closing Routes to Retirement: How Do People Respond?," Discussion Papers of DIW Berlin 1653, DIW Berlin, German Institute for Economic Research.
    16. Day Manoli & Kathleen J. Mullen & Mathis Wagner, 2015. "Policy Variation, Labor Supply Elasticities, And A Structural Model Of Retirement," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1702-1717, October.
    17. David M. Blau, 2008. "Retirement and Consumption in a Life Cycle Model," Journal of Labor Economics, University of Chicago Press, vol. 26(1), pages 35-71.
    18. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, May.
    19. Susann Rohwedder & Robert J. Willis, 2010. "Mental Retirement," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 119-138, Winter.
    20. Bonsang, Eric & Adam, Stéphane & Perelman, Sergio, 2012. "Does retirement affect cognitive functioning?," Journal of Health Economics, Elsevier, vol. 31(3), pages 490-501.
    21. Kadir Atalay & Garry F. Barrett, 2015. "The Impact of Age Pension Eligibility Age on Retirement and Program Dependence: Evidence from an Australian Experiment," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 71-87, March.
    22. Graf, Nikolaus & Hofer, Helmut & Winter-Ebmer, Rudolf, 2011. "Labor supply effects of a subsidized old-age part-time scheme in Austria," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 44(3), pages 217-229.
    23. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    24. Hugo Benitez-Silva, 2000. "A Dynamic Model of Labor Supply, Consumption/Saving, and Annuity Decisions under Uncertainty," Department of Economics Working Papers 00-06, Stony Brook University, Department of Economics.
    25. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
    26. Elsayed, Ahmed & de Grip, Andries & Fouarge, Didier & Montizaan, Raymond, 2018. "Gradual retirement, financial incentives, and labour supply of older workers: Evidence from a stated preference analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 277-294.
    27. Berg, Peter B. & Hamman, Mary K. & Piszczek, Matthew & Ruhm, Christopher J., 2015. "Can Policy Facilitate Partial Retirement? Evidence from Germany," IZA Discussion Papers 9266, Institute of Labor Economics (IZA).
    28. Bernd Fitzenberger & Aderonke Osikominu & Robert Völter, 2006. "Imputation Rules to Improve the Education Variable in the IAB Employment Subsample," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 126(3), pages 405-436.
    29. John P. Rust, 1989. "A Dynamic Programming Model of Retirement Behavior," NBER Chapters, in: The Economics of Aging, pages 359-404, National Bureau of Economic Research, Inc.
    30. Gustman, Alan L. & Steinmeier, Thomas L., 2005. "The social security early entitlement age in a structural model of retirement and wealth," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 441-463, February.
    31. Martin Huber & Michael Lechner & Conny Wunsch, 2016. "The Effect of Firms’ Phased Retirement Policies on the Labor Market Outcomes of Their Employees," ILR Review, Cornell University, ILR School, vol. 69(5), pages 1216-1248, October.
    32. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-1035, December.
    33. Welteke, Clara & Geyer, Johannes & Haan, Peter, 2016. "Early retirement eligibility and employment behavior: evidence from a cohort based pension reform," VfS Annual Conference 2016 (Augsburg): Demographic Change 145783, Verein für Socialpolitik / German Economic Association.
    34. Staubli, Stefan & Zweimüller, Josef, 2013. "Does raising the early retirement age increase employment of older workers?," Journal of Public Economics, Elsevier, vol. 108(C), pages 17-32.
    35. Nicole Maestas & Julie Zissimopoulos, 2010. "How Longer Work Lives Ease the Crunch of Population Aging," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 139-160, Winter.
    36. Staubli, Stefan, 2011. "The impact of stricter criteria for disability insurance on labor force participation," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1223-1235, October.
    37. Arjan Heyma, 2004. "A structural dynamic analysis of retirement behaviour in the Netherlands," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 739-759.
    38. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
    39. Anders Karlstrom & Marten Palme & Ingemar Svensson, 2004. "A dynamic programming approach to model the retirement behaviour of blue-collar workers in Sweden," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 795-807.
    40. Duggan, Mark & Singleton, Perry & Song, Jae, 2007. "Aching to retire? The rise in the full retirement age and its impact on the social security disability rolls," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1327-1350, August.
    41. Börsch-Supan, Axel & Bucher-Koenen, Tabea & Kluth, Sebastian & Haupt, Marlene & Goll, Nicolas, 2015. "Vor- und Nachteile höherer Flexibilität als Instrument zur Erhöhung der Beschäftigung Älterer," MEA discussion paper series 201506, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    42. repec:iab:iabfme:200503(en is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Haan, Peter & Tolan, Songül, 2019. "Labor supply and fiscal effects of partial retirement – The role of entry age and the timing of pension benefits," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Haan, Peter & Tolan, Songül, 2019. "Labor supply and fiscal effects of partial retirement – The role of entry age and the timing of pension benefits," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).
    2. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 457-566, Elsevier.
    3. Engels, Barbara & Geyer, Johannes & Haan, Peter, 2017. "Pension incentives and early retirement," Labour Economics, Elsevier, vol. 47(C), pages 216-231.
    4. Bönke, Timm & Kemptner, Daniel & Lüthen, Holger, 2018. "Effectiveness of early retirement disincentives: Individual welfare, distributional and fiscal implications," Labour Economics, Elsevier, vol. 51(C), pages 25-37.
    5. Barbara Engels & Johannes Geyer & Peter Haan, 2016. "Pension Incentives and Early Retirement," Discussion Papers of DIW Berlin 1617, DIW Berlin, German Institute for Economic Research.
    6. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    7. Geyer, Johannes & Haan, Peter & Hammerschmid, Anna & Peters, Michael, 2020. "Labor Market and Distributional Effects of an Increase in the Retirement Age," Labour Economics, Elsevier, vol. 65(C).
    8. Gohl, Niklas & Haan, Peter & Kurz, Elisabeth & Weinhardt, Felix, 2020. "Working Life and Human Capital Investment: Causal Evidence from Pension Reform," IZA Discussion Papers 12891, Institute of Labor Economics (IZA).
    9. Kemptner, Daniel, 2019. "Health-related life cycle risks and public insurance," Journal of Health Economics, Elsevier, vol. 65(C), pages 227-245.
    10. Endler, Johannes & Geyer, Johannes, 2017. "The Interaction of Pension System and Unemployment Insurance - Evidence from two Reforms," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168279, Verein für Socialpolitik / German Economic Association.
    11. Niklas Gohl & Peter Haan & Elisabeth Kurz & Felix Weinhardt, 2021. "Working life and human capital investment," CEP Discussion Papers dp1753, Centre for Economic Performance, LSE.
    12. Gohl, Niklas & Haan, Peter & Kurz, Elisabeth & Weinhardt, Felix, 2021. "Working life and human capital investment," LSE Research Online Documents on Economics 114422, London School of Economics and Political Science, LSE Library.
    13. Eric French & John Bailey Jones, 2017. "Health, Health Insurance, and Retirement: A Survey," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 383-409, September.
    14. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, May.
    15. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
    16. de Bresser, Jochem, 2021. "Evaluating the Accuracy of Counterfactuals The Role of Heterogeneous Expectations in Life Cycle Models," Other publications TiSEM a7e2b4d8-fed0-4e86-926f-d, Tilburg University, School of Economics and Management.
    17. Chiara Ardito, 2017. "Rising pension age in Italy: Employment response and Program substitution," LABORatorio R. Revelli Working Papers Series 155, LABORatorio R. Revelli, Centre for Employment Studies.
    18. de Bresser, Jochem, 2021. "Evaluating the Accuracy of Counterfactuals The Role of Heterogeneous Expectations in Life Cycle Models," Discussion Paper 2021-034, Tilburg University, Center for Economic Research.
    19. Noelia Bernal & Frederic Vermeulen, 2014. "The Impact of an Increase in the Legal Retirement Age on the Effective Retirement Age," De Economist, Springer, vol. 162(2), pages 115-145, June.
    20. Bound, John & Stinebrickner, Todd & Waidmann, Timothy, 2010. "Health, economic resources and the work decisions of older men," Journal of Econometrics, Elsevier, vol. 156(1), pages 106-129, May.

    More about this item

    Keywords

    Retirement; Partial Retirement; Social Security and Public Pensions; Structural estimation; Dynamic Discrete Choice;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1679. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.