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 Discussion Papers and 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. Alan L. Gustman & Thomas L. Steinmeier, 1984. "Partial Retirement and the Analysis of Retirement Behavior," ILR Review, Cornell University, ILR School, vol. 37(3), pages 403-415, April.
    11. C. N. Morris, 1981. "The age allowance," Fiscal Studies, Institute for Fiscal Studies, vol. 2(3), pages 29-36, November.
    12. Richard Disney & Costas Meghir & Edward Whitehouse, 1994. "Retirement behaviour in Britain," Fiscal Studies, Institute for Fiscal Studies, vol. 15(1), pages 24-43, February.
    13. 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.
    14. 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.
    15. 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.
    16. 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.
    17. 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.
    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, December.
    20. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection Discussion Papers and 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.
    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. repec:imf:imfops:147 is not listed on IDEAS
    27. 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.
    28. Ruhm, Christopher J, 1990. "Bridge Jobs and Partial Retirement," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 482-501, October.
    29. 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.
    30. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    31. Whitehouse, Edward, 1999. "The tax treatment of funded pensions," MPRA Paper 14173, University Library of Munich, Germany.
    32. 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.
    33. 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.
    34. 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.
    35. Friedberg, Leora, 1999. "The effect of old age assistance on retirement," Journal of Public Economics, Elsevier, vol. 71(2), pages 213-232, February.
    36. 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.
    37. 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.
    38. 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, 2001. "Pension systems in 15 countries compared: the value of entitlements," MPRA Paper 14751, University Library of Munich, Germany.
    3. 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.
    4. Queisser, Monika & Whitehouse, Edward, 2005. "Pensions at a glance: public policies across OECD countries," MPRA Paper 10907, University Library of Munich, Germany.
    5. Castel, Paulette & Fox, Louise, 2001. "Gender dimensions of pension reform in the Former Soviet Union," Policy Research Working Paper Series 2546, The World Bank.
    6. Whitehouse, Edward, 2000. "How poor are the old? a survey of evidence from 44 countries," Social Protection Discussion Papers and Notes 23141, The World Bank.
    7. Disney, Richard & Whitehouse, Edward, 2001. "Cross-country comparisons of pensioners’ incomes," MPRA Paper 16345, University Library of Munich, Germany.
    8. 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.
    9. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sewin Chan & Ann Huff Stevens, 1999. "Job Loss and Retirement Behavior of Older Men," NBER Working Papers 6920, National Bureau of Economic Research, Inc.
    2. Samwick, Andrew A., 1998. "New evidence on pensions, social security, and the timing of retirement," Journal of Public Economics, Elsevier, vol. 70(2), pages 207-236, November.
    3. repec:eee:labchp:v:3:y:1999:i:pc:p:3261-3307 is not listed on IDEAS
    4. Robert L. Clark & Joseph F. Quinn, 1999. "Effects of Pensions on Labor Markets and Retirement," Boston College Working Papers in Economics 431, Boston College Department of Economics.
    5. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 457-566, Elsevier.
    6. Palacios, Robert, 2006. "Civil-service pension schemes around the world," MPRA Paper 14796, University Library of Munich, Germany.
    7. Whitehouse, Edward, 1998. "Pension Reform in Britain," MPRA Paper 14175, University Library of Munich, Germany.
    8. 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.
    9. Randall K. Filer & Marjorie Honig, 2005. "Endogenous Pensions and Retirement Behavior," Economics Working Paper Archive at Hunter College 410, Hunter College Department of Economics.
    10. Whitehouse, Edward, 2001. "Pension systems in 15 countries compared: the value of entitlements," MPRA Paper 14751, University Library of Munich, Germany.
    11. Courtney Coile & Jonathan Gruber, 2001. "Social Security Incentives for Retirement," NBER Chapters, in: Themes in the Economics of Aging, pages 311-354, National Bureau of Economic Research, Inc.
    12. Whitehouse, Edward, 2000. "Pension reform, financial literacy and public information: a case study of the United Kingdom," MPRA Paper 10323, University Library of Munich, Germany.
    13. Catherine Cazals, 1994. "La retraite dans les modèles d'offre de travail : un survol de la littérature," Économie et Prévision, Programme National Persée, vol. 115(4), pages 43-62.
    14. Richard Disney & Tanner, Tanner, 1999. "What can we learn from retirement expectations data?," IFS Working Papers W99/17, Institute for Fiscal Studies.
    15. Alan L. Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, 1993. "The Role of Pensions in the Labor Market," NBER Working Papers 4295, National Bureau of Economic Research, Inc.
    16. Sarah Tanner, 1998. "The dynamics of male retirement behaviour," Fiscal Studies, Institute for Fiscal Studies, vol. 19(2), pages 175-196, May.
    17. Coile Courtney, 2004. "Retirement Incentives and Couples' Retirement Decisions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-30, July.
    18. Richard Disney & Carl Emmerson & Sarah Smith, 2004. "Pension Reform and Economic Performance in Britain in the 1980s and 1990s," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 233-274, National Bureau of Economic Research, Inc.
    19. Hakola, Tuulia, 2002. "Alternative Approaches to Model Withdrawals from the Labour Market – A Literature Review," Working Paper Series 2003:4, Uppsala University, Department of Economics.
    20. Richard Disney, 1996. "Ageing and saving," Fiscal Studies, Institute for Fiscal Studies, vol. 17(2), pages 83-101, May.
    21. Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers W99/18, Institute for Fiscal Studies.

    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: . General contact details of provider: https://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 bibliographic 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.

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

    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.