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Determinants of Retirement: Does Money Really matter?


  • Janice Compton


The worker to non-worker ratio in Canada is forecasted to fall dramatically over the next few decades due both to demographic pressures and the recent decline in the average age of retirement. If governments desire to reverse these trends, it is necessary to determine whether altering Canada’s retirement income programs may impact retirement decisions. This analysis focuses on the CPP/QPP program using the internal longitudinal files of the Survey of Labour and Income Dynamics (SLID) and concludes that limited changes to CPP/QPP benefit levels will not have a large impact on the labour force behaviour of older workers. CPP/QPP benefits can affect retirement through two channels – by altering the relative benefits of work (the substitution effect) and by changing the net present value of lifetime wealth (the wealth effect). We first demonstrate that retirement and CPP/QPP benefit take-up are not temporally connected for most Canadians. This means that the substitution effect is unlikely to have an important impact on retirement decisions. We then use hazard regressions and ordered probit analyses to determine which factors influence retirement behaviour. We find no evidence that expected CPP/QPP benefits or current wage levels influence the retirement decision. This result provides further evidence that CPP/QPP benefits are not having a large impact on retirement through the substitution effect. We also find no evidence that wealth affects the retirement decision. Instead, demographic factors such as disability status, labour force status of spouse and class of worker dominate the regressions. This does not necessarily mean that the CPP/QPP program does not influence retirement, only that its influence is likely to be embedded in the structure of the program and the existence of borrowing constraints rather than through the benefit levels. However, the results also indicate that structural changes may not be required in order to raise the retirement age. Variables that do have a strong effect on retirement behaviour are moving in directions that may result in a reversal of the early retirement trend. Au Canada, le ratio des actifs aux non-actifs devrait diminuer sensiblement au cours des prochaines décennies, en raison de tensions démographiques et de la récente baisse de l’âge moyen de la retraite. Si les administrations publiques désirent inverser ces tendances, il leur faut déterminer si la modification des régimes de revenu de retraite peut influer sur les décisions liées à la retraite. Cette analyse porte sur le RPC/RRQ; elle utilise les fichiers longitudinaux internes de l’enquête sur la dynamique du travail et du revenu (EDTR) et elle conclut que des changements limités aux prestations du RPC/RRQ n’auront pas d’importantes répercussions sur le comportement des travailleurs plus âgés. Les prestations du RPC/RRQ peuvent influer sur la retraite de deux façons – en modifiant les avantages comparatifs du travail (l’effet de substitution) et en changeant la valeur actualisée nette de la richesse viagère (l’effet de richesse). Nous démontrons d’abord que la retraite et les prestations du RPC/RRQ ne sont pas reliées dans le temps pour la plupart des Canadiens. Cela signifie que l’effet de substitution n’aura probablement pas de répercussions importantes sur les décisions liées à la retraite. Nous utilisons ensuite des régressions de risques et des analyses ordonnées par la méthode des probits pour déterminer les facteurs qui influent sur le comportement. Nous constatons que rien ne prouve que les prestations prévues du RPC/RRQ ou les salaires actuels influent sur les décisions liées à la retraite. Ce résultat prouve encore une fois que les prestations du RPC/RRQ n’ont pas de répercussions importantes sur la retraite par le biais de l’effet de substitution. Nous constatons aussi que rien ne prouve que la richesse influe sur les décisions liées à la retraite. Plutôt, des facteurs démographiques, comme l’état de personne handicapée, la situation d’activité du conjoint et la catégorie de travailleurs, dominent les régressions. Cela ne signifie pas nécessairement que le RPC/RRQ n’influe pas sur la retraite, mais seulement que son influence est probablement incluse dans la structure du programme et l’existence des contraintes d’emprunt plutôt que de se manifester par le biais des prestations. Toutefois, les résultats indiquent aussi qu’il se peut qu’il ne soit pas nécessaire d’apporter des changements structurels pour relever l’âge de la retraite. Les variables qui influent fortement sur le comportement évoluent dans des directions qui peuvent se traduire par une inversion de la tendance à la retraite anticipée.

Suggested Citation

  • Janice Compton, "undated". "Determinants of Retirement: Does Money Really matter?," Working Papers-Department of Finance Canada 2001-02, Department of Finance Canada.
  • Handle: RePEc:fca:wpfnca:2001-02

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    References listed on IDEAS

    1. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-362, June.
    2. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.
    3. D. W. Jorgenson & Z. Griliches, 1967. "The Explanation of Productivity Change," Review of Economic Studies, Oxford University Press, vol. 34(3), pages 249-283.
    4. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
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    Cited by:

    1. Michael Baker & Jonathan Gruber & Kevin Milligan, 2003. "The retirement incentive effects of Canada's Income Security programs," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 261-290, May.
    2. Frank T. Denton & Byron G. Spencer, 2008. "What is Retirement? A Review and Assessment of Alternative Concepts and Measures," Social and Economic Dimensions of an Aging Population Research Papers 231, McMaster University.
    3. Goulão, Catarina & Gouveia, Miguel, 2011. "Are we doing enough to discourage early retirement?," TSE Working Papers 11-220, Toulouse School of Economics (TSE).
    4. Kevin Milligan & Tammy Schirle, 2008. "Improving the Labour Market Incentives of Canada's Public Pensions," Canadian Public Policy, University of Toronto Press, vol. 34(3), pages 281-304, September.

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