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Why Forcing People to Save Retirement May Backfire

  • Monika Bütler
  • Olivia Huguenin
  • Federica Teppa

Early retirement is predominantly considered to be the result of incentives set by social security and the tax system. But the Swiss example demonstrates that the incidence of early retirement has dramatically increased even in the absence of institutional changes. We argue that an actuarially fair, but mandatory funded system may also distort optimal individual allocation. If individuals are credit constraint (or just reluctant to borrow), a higher than desired retirement capital induces people to retire earlier than they would have in the absence of such a scheme. Individuals thus retire as soon as the retirement income is deemed sufficient the pension plan avails withdrawal of benefits. We provide evidence using individual data from a selection of Swiss pension funds, allowing us to perfectly control for pension scheme details. Our findings suggest that affordability is indeed a key determinant in the retirement decisions. The fact that early retirement has become much more prevalent in the last 15 years is a strong indicator for the importance of affordability as the maturing the Swiss mandatory funded pension system over that period has led to an increase in the already high effective replacement rates. Moreover, even after controlling for the time trend, the higher the accumulated pension capital, the earlier men, and - to a smaller extent - women, tend to leave the work force.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 05.05.

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Length: 48 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:lau:crdeep:05.05
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.20
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