IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/14755.html
   My bibliography  Save this paper

Pension plans and retirement incentives

Author

Listed:
  • Disney, Richard
  • Whitehouse, Edward

Abstract

The object of this paper is to examine the impact of type of pension scheme on retirement behaviour. The well-documented decline in the labour-force participation of older women and older men (in particular) is common to most industrialised countries. The proportion of men aged 55 to 64 in employment fell between 1980 and 1996 in all 17 OECD countries for which data are available, by an average of more than ten percentage points. The average employment rate of men in this age group in 1996 was a little under 60 per cent. The reasons for this are complex, but probably involve both a demand effect — high and persistent unemployment, especially in Europe — and a supply effect — pension benefits and the value of other savings have increased. It is desirable to encourage people to retire later to counterbalance the effect of population ageing on the ratio of workers to dependants. Some have argued that this can be achieved with ‘parametric reforms’, tinkering with the rules of existing public defined-benefit schemes. Many countries, however, have introduced or proposed more radical reforms emphasising the role of privately managed defined-contribution pensions. An obvious question is how these regimes are likely to affect retirement behaviour. The paper presents a model of a simple (defined contribution) pension plan and looks at the optimal retirement date, which is found to depend on prospective earnings and the evolution of the accumulated pension fund, which, in principle, are separable. The paper also looks at defined-benefit pension schemes, which are the norm in public and much private provision. Here there are significant interactions and complications. The pension formula is often non-linear, with accrual rates that vary with the number of years of contributions and formulae that depend on a limited number of ‘best’ or ‘final’ years of earnings. There are also ‘spikes’ when early retirement is first permitted, at the standard retirement age etc. Pensions can be actuarially adjusted, depending on the year at which benefits are first drawn. We show that the incentives in a defined-benefit scheme are very different from the defined-contribution retirement saving plan.

Suggested Citation

  • Disney, Richard & Whitehouse, Edward, 1999. "Pension plans and retirement incentives," MPRA Paper 14755, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:14755
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/14755/1/MPRA_paper_14755.pdf
    File Function: original version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher J. Ruhm, 1995. "Secular Changes in the Work and Retirement Patterns of Older Men," Journal of Human Resources, University of Wisconsin Press, vol. 30(2), pages 362-385.
    2. Boskin, Michael J. & Hurd, Michael D., 1978. "The effect of social security on early retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 361-377, December.
    3. Gustman, Alan L & Steinmeier, Thomas L, 1986. "A Structural Retirement Model," Econometrica, Econometric Society, vol. 54(3), pages 555-584, May.
    4. Gora, Marek & Rutkowski, Michal, 1998. "The quest for pension reform : Poland's security through diversity," Social Protection and Labor Policy and Technical Notes 20111, The World Bank.
    5. 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.
    6. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
    7. 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.
    8. 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.
    9. Leora Friedberg, 1998. "The Social Security Earnings Test and Labor Supply of Older Men," NBER Chapters,in: Tax Policy and the Economy, Volume 12, pages 121-150 National Bureau of Economic Research, Inc.
    10. C. N. Morris, 1981. "The age allowance," Fiscal Studies, Institute for Fiscal Studies, vol. 2(3), pages 29-36, November.
    11. Richard Disney & Costas Meghir & Edward Whitehouse, 1994. "Retirement behaviour in Britain," Fiscal Studies, Institute for Fiscal Studies, vol. 15(1), pages 24-43, February.
    12. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1994. "Pension Plan Provisions and Retirement: Men and Women, Medicare, and Models," NBER Chapters,in: Studies in the Economics of Aging, pages 183-222 National Bureau of Economic Research, Inc.
    13. Ruhm, Christopher J., 1996. "Do pensions increase the labor supply of older men?," Journal of Public Economics, Elsevier, vol. 59(2), pages 157-175, February.
    14. Richard W. Johnson & David Neumark, 1997. "Age Discrimination, Job Separations, and Employment Status of Older Workers: Evidence from Self-Reports," Journal of Human Resources, University of Wisconsin Press, vol. 32(4), pages 779-811.
    15. Marten Palme & lngemar Svensson, 1999. "Social Security, Occupational Pensions, and Retirement in Sweden," NBER Chapters,in: Social Security and Retirement around the World, pages 355-402 National Bureau of Economic Research, Inc.
    16. Richard Disney, 1995. "Occupational pension schemes: prospects and reforms in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 16(3), pages 19-39, September.
    17. Sheetal K. Chand & Albert Jaeger, 1996. "Aging Populations and Public Pension Schemes," IMF Occasional Papers 147, International Monetary Fund.
    18. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
    19. Richard Disney, 1996. "Can We Afford to Grow Older?," MIT Press Books, The MIT Press, edition 1, volume 1, number 026204157x, January.
    20. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection and Labor Policy and Technical Notes 20048, The World Bank.
    21. Joseph F. Quinn & Richard V. Burkhauser & Daniel A. Myers, 1990. "Passing the Torch: The Influence of Economic Incentives on Work and Retirement," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number pt, November.
    22. Amanda Gosling & Stephen Machin & Costas Meghir, 2000. "The Changing Distribution of Male Wages in the U.K," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 635-666.
    23. Richard B. Freeman, 1979. "The Effect of Demographic Factors on Age-Earnings Profiles," Journal of Human Resources, University of Wisconsin Press, vol. 14(3), pages 289-318.
    24. Alan L. Gustman & Thomas L. Steinmeier, 1989. "The Stampede Toward Defined Contribution Pension Plans: Fact or Fiction?," NBER Working Papers 3086, National Bureau of Economic Research, Inc.
    25. Sewin Chan & Ann Huff Stevens, 1999. "Job Loss and Retirement Behavior of Older Men," NBER Working Papers 6920, National Bureau of Economic Research, Inc.
    26. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters,in: Issues in Pension Economics, pages 283-340 National Bureau of Economic Research, Inc.
    27. Ruhm, Christopher J, 1990. "Bridge Jobs and Partial Retirement," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 482-501, October.
    28. Anderson, Patricia M & Gustman, Alan L & Steinmeier, Thomas L, 1999. "Trends in Male Labor Force Participation and Retirement: Some Evidence on the Role of Pensions and Social Security in the 1970s and 1980s," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages 757-783, October.
    29. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    30. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," MPRA Paper 14173, University Library of Munich, Germany.
    31. Didier Blanchet & Cécile Brousse & Mahrez Okba, 1996. "Retraite, préretraite, neutralité actuarielle et couverture du risque de chômage en fin de carrière," Économie et Statistique, Programme National Persée, vol. 291(1), pages 203-218.
    32. Gary Burtless, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 781-805.
    33. Gerhard Naegele, 1996. "New Trends in Gradual Retirement in Germany*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 21(4), pages 524-533, October.
    34. Friedberg, Leora, 1999. "The effect of old age assistance on retirement," Journal of Public Economics, Elsevier, vol. 71(2), pages 213-232, February.
    35. Zvi Bodie & John B. Shoven & David A. Wise, 1988. "Pensions in the U.S. Economy," NBER Books, National Bureau of Economic Research, Inc, number bodi88-1, April.
    36. Dilnot, Andrew & Disney, Richard & Johnson, Paul & Whitehouse, Edward, 1994. "Pensions policy in the UK: An economic analysis," MPRA Paper 10478, University Library of Munich, Germany.
    37. Edward Whitehouse, 1990. "The abolition of the pensions 'earnings rule'," Fiscal Studies, Institute for Fiscal Studies, vol. 11(3), pages 55-70, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Whitehouse, Edward, 2000. "Administrative charges for funded pensions: An international comparison and assessment," MPRA Paper 14172, University Library of Munich, Germany.
    2. Whitehouse, Edward, 2000. "Paying for pensions: An international comparison of administrative charges in funded retirement-income systems," MPRA Paper 14171, University Library of Munich, Germany.
    3. Queisser, Monika & Whitehouse, Edward, 2005. "Pensions at a glance: public policies across OECD countries," MPRA Paper 10907, University Library of Munich, Germany.
    4. Castel, Paulette & Fox, Louise, 2001. "Gender dimensions of pension reform in the Former Soviet Union," Policy Research Working Paper Series 2546, The World Bank.
    5. Ondøej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 292-308, Oktober.
    6. Whitehouse, Edward, 2000. "How Poor are the Old? A Survey of Evidence from 44 Countries," MPRA Paper 14177, University Library of Munich, Germany.
    7. Tryggvi Thor Herbertsson, 2001. "Shrinking Labour Forces and Early Retirement," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(4), pages 31-37, October.
    8. Whitehouse, Edward, 2001. "Pension systems in 15 countries compared: the value of entitlements," MPRA Paper 14751, University Library of Munich, Germany.
    9. Disney, Richard & Whitehouse, Edward, 2001. "Cross-country comparisons of pensioners’ incomes," MPRA Paper 16345, University Library of Munich, Germany.

    More about this item

    Keywords

    pensions; retirement;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:14755. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.