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The Effect of Disability Pension Incentives on Early Retirement Decisions

  • Barbara Hanel

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and Institute for the Study of Labor (IZA))

I investigate the incentive effects of disability pensions on the labour supply decision. The implicit tax rate on further work is included as a forward looking incentive measure in order to investigate the effect of disability benefits on disability retirement entry as a special type of early retirement. A substantial change of the disability pension legislation caused exogenous variation in disability benefits in Germany in 2001 and is used to obtain estimates of individual’s responses to financial incentives. Benefit levels appear to have no effect on the labour market behaviour. At the same time, there is a sizable and significant disincentive effect of implicit taxes on labour market income, indicating that alleviating such disincentives would likely increase labour force participation. Since the response to financial incentives occurs mainly among those in good health, such a policy might on the other hand imperil the aim of providing insurance against a health induced loss of ones working capacity.

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2011n05.

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Length: 36 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:iae:iaewps:wp2011n05
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Web page: http://www.melbourneinstitute.com/
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