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The Effect of Disability Pension Incentives on Early Retirement Decisions

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  • Barbara Hanel

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

Abstract

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.

Suggested Citation

  • Barbara Hanel, 2011. "The Effect of Disability Pension Incentives on Early Retirement Decisions," Melbourne Institute Working Paper Series wp2011n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2011n05
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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2011n05.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:labeco:v:47:y:2017:i:c:p:216-231 is not listed on IDEAS
    2. Robert E. Hall, 2015. "Quantifying the Lasting Harm to the US Economy from the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 71-128.
    3. Axel Börsch-Supan & Tabea Bucher-Koenen & Michela Coppola & Bettina Lamla, 2015. "Savings In Times Of Demographic Change: Lessons From The German Experience," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 807-829, September.
    4. repec:spr:jlabrs:v:50:y:2017:i:1:d:10.1007_s12651-017-0221-9 is not listed on IDEAS
    5. Robert E. Hall, 2014. "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis," NBER Chapters,in: NBER Macroeconomics Annual 2014, Volume 29, pages 71-128 National Bureau of Economic Research, Inc.
    6. Sahlgren, Gabriel H., 2012. "Work ‘til You Drop: Short- and Longer-Term Health Effects of Retirement in Europe," Working Paper Series 928, Research Institute of Industrial Economics.
    7. Engels, Barbara & Geyer, Johannes & Haan, Peter, 2017. "Pension incentives and early retirement," Labour Economics, Elsevier, vol. 47(C), pages 216-231.
    8. repec:ipf:psejou:v:41:y:2017:i:1:p:109-128 is not listed on IDEAS

    More about this item

    Keywords

    Disability pensions; labour force exit;

    JEL classification:

    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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