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Incentive Effects of Social Security Under an Uncertain Disability Option

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  • Axel Boersch-Supan

Abstract

Incentive effects of pension systems are usually estimated under the assumption that the institutional environment provides a single optimal 'pathway' for retirement. However, many countries provide competing pathways which may include several early retirement options in addition to normal retirement. Moreover, early retirement options often comprise special provisions for disabled and unemployed workers that can be strategically manipulated by the employer and the employee while ultimate eligibility for such provisions is uncertain in advance. This paper shows that ignoring the endogeneity and/or uncertainty in the relevant institutional setting can severely bias the estimates of incentive effects. Ignoring the endogeneity leads to overestimated incentive effects that unduly exaggerate the 'pull' view of early retirement. In turn, when the uncertain option set is specified too generously, incentive effects are underestimated. The paper proposes several estimates to bound the true incentive effects of social security on early retirement, and applies them to the German public pension system.

Suggested Citation

  • Axel Boersch-Supan, 1999. "Incentive Effects of Social Security Under an Uncertain Disability Option," NBER Working Papers 7339, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7339
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    1. Meghir, Costas & Whitehouse, Edward, 1997. "Labour market transitions and retirement of men in the UK," Journal of Econometrics, Elsevier, vol. 79(2), pages 327-354, August.
    2. James H. Stock & David A. Wise, 1990. "The Pension Inducement to Retire: An Option Value Analysis," NBER Chapters,in: Issues in the Economics of Aging, pages 205-230 National Bureau of Economic Research, Inc.
    3. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1992. "Three Models of Retirement: Computational Complexity versus Predictive Validity," NBER Chapters,in: Topics in the Economics of Aging, pages 21-60 National Bureau of Economic Research, Inc.
    4. 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.
    5. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
    6. Borsch-Supan, Axel & Schnabel, Reinhold, 1998. "Social Security and Declining Labor-Force Participation in Germany," American Economic Review, American Economic Association, vol. 88(2), pages 173-178, May.
    7. John P. Rust, 1990. "Behavior of Male Workers at the End of the Life Cycle: An Empirical Analysis of States and Controls," NBER Chapters,in: Issues in the Economics of Aging, pages 317-382 National Bureau of Economic Research, Inc.
    8. Glenn T. Sueyoshi, 1989. "Social Security and the Determinants of Full and Partial Retirement: A Competing Risks Analysis," NBER Working Papers 3113, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Reil-Held, Anette, 2000. "Einkommen und Sterblichkeit in Deutschland: Leben Reiche länger?," Sonderforschungsbereich 504 Publications 00-14, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    2. Tamon Asonuma & Xavier Debrun & Paul R Masson, 2012. "Welfare Effects of Monetary Integration; The Common Monetary Area and Beyond," IMF Working Papers 12/136, International Monetary Fund.
    3. Daniel Hallberg & Matias Eklöf, 2010. "Do buy-outs of older workers matter?: Estimating retirement behavior with special early retirement offers," International Journal of Manpower, Emerald Group Publishing, vol. 31(3), pages 337-359, June.
    4. Axel Börsch-Supan & Reinhold Schnabel & Simone Kohnz & Giovanni Mastrobuoni, 2004. "Micro-Modeling of Retirement Decisions in Germany," NBER Chapters,in: Social Security Programs and Retirement around the World: Micro-Estimation, pages 285-344 National Bureau of Economic Research, Inc.
    5. Olivia S. Mitchell & John W.R. Phillips, 2000. "Retirement Responses to Early Social Security Benefit Reductions," NBER Working Papers 7963, National Bureau of Economic Research, Inc.
    6. Olivia S. Mitchell & John W.R. Phillips, 2001. "Eligibility for Social Security Disability Insurance," Working Papers wp011, University of Michigan, Michigan Retirement Research Center.

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