IDEAS home Printed from https://ideas.repec.org/p/usg/dp2005/2005-09.html
   My bibliography  Save this paper

Why Forcing People to Save for Retirement May Backfire

Author

Listed:
  • Monika Bütler
  • Olivia Huguenin
  • Federica Teppa

Abstract

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.

Suggested Citation

  • Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save for Retirement May Backfire," University of St. Gallen Department of Economics working paper series 2005 2005-09, Department of Economics, University of St. Gallen.
  • Handle: RePEc:usg:dp2005:2005-09
    as

    Download full text from publisher

    File URL: http://ux-tauri.unisg.ch/RePEc/usg/dp2005/DP-09_Bue.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Butler, Monika & Ruesch, Martin, 2007. "Annuities in Switzerland," Policy Research Working Paper Series 4438, The World Bank.
    2. Stern, Steven, 1997. "Approximate Solutions to Stochastic Dynamic Programs," Econometric Theory, Cambridge University Press, vol. 13(3), pages 392-405, June.
    3. Blau, David M, 1998. "Labor Force Dynamics of Older Married Couples," Journal of Labor Economics, University of Chicago Press, vol. 16(3), pages 595-629, July.
    4. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-1130, December.
    5. Alan L. Gustman & Thomas L. Steinmeier, 1994. "Retirement in a Family Context: A Structural Model for Husbands and Wives," NBER Working Papers 4629, National Bureau of Economic Research, Inc.
    6. Wise, David A., 1985. "Pensions, Labor, and Individual Choice," National Bureau of Economic Research Books, University of Chicago Press, number 9780226902937, December.
    7. David E. Bloom & David Canning & Michael Moore, 2004. "The Effect of Improvements in Health and Longevity on Optimal Retirement and Saving," NBER Working Papers 10919, National Bureau of Economic Research, Inc.
    8. Pablo Antolín & Stefano Scarpetta, 1998. "Microeconometric Analysis of the Retirement Decision: Germany," OECD Economics Department Working Papers 204, OECD Publishing.
    9. Michael Hurd & Susann Rohwedder, 2003. "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," NBER Working Papers 9586, National Bureau of Economic Research, Inc.
    10. Michael D. Hurd, 1990. "The Joint Retirement Decision of Husbands and Wives," NBER Chapters, in: Issues in the Economics of Aging, pages 231-258, National Bureau of Economic Research, Inc.
    11. Mark Y. An & Bent Jesper Christensen & Nabanita Datta Gupta, 2004. "Multivariate mixed proportional hazard modelling of the joint retirement of married couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 687-704.
    12. David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, February.
    13. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1, February.
    14. repec:cup:etheor:v:13:y:1997:i:3:p:392-405 is not listed on IDEAS
    15. Bingley, Paul & Lanot, Gauthier, 2004. "Employer pay policies, public transfers and the retirement decisions of men and women in Denmark," European Economic Review, Elsevier, vol. 48(1), pages 181-200, February.
    16. Laurence J. Kotlikoff, 1979. "Social Security and Equilibrium Capital Intensity," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 233-253.
    17. 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.
    18. Craig, Ben & Batina, Raymond G., 1991. "The effects of social security in a life cycle family labor supply simulation model," Journal of Public Economics, Elsevier, vol. 46(2), pages 199-226, November.
    19. Nicole Maestas, 2004. "Back to Work: Expectations and Realizations of Work After Retirement," Working Papers wp085, University of Michigan, Michigan Retirement Research Center.
    20. Jerry A. Hausman & David A. Wise, 1985. "Social Security, Health Status, and Retirement," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 159-192, National Bureau of Economic Research, Inc.
    21. Vincent P. Crawford & David M. Lilien, 1981. "Social Security and the Retirement Decision," The Quarterly Journal of Economics, Oxford University Press, vol. 96(3), pages 505-529.
    22. Dora L. Costa, 1998. "The Evolution of Retirement: An American Economic History, 1880-1990," NBER Books, National Bureau of Economic Research, Inc, number cost98-1, February.
    23. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
    24. Michael D. Hurd & Susann Rohwedder, 2003. "The Retirement-Consumption Puzzle Anticipated and Actual Declines in Spending at Retirement," Working Papers DRU-3009, RAND Corporation.
    25. Raffaele Miniaci, 1998. "Microeconometric Analysis of the Retirement Decision: Italy," OECD Economics Department Working Papers 205, OECD Publishing.
    26. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-1180, September.
    27. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, vol. 91(10), pages 1944-1966, November.
    28. Zweimuller, Josef & Winter-Ebmer, Rudolf & Falkinger, Josef, 1996. "Retirement of spouses and social security reform," European Economic Review, Elsevier, vol. 40(2), pages 449-472, February.
    29. Jiménez-Martín, Sergi & Labeaga, José M. & Martínez-Granado, Maite, 1999. "Health status and retirement decisison for older european couples," UC3M Working papers. Economics 6170, Universidad Carlos III de Madrid. Departamento de Economía.
    30. Costa, Dora L., 1998. "The Evolution of Retirement," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226116082, December.
    31. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
    32. Elsa Fornero & Elisa Luciano (ed.), 2004. "Developing an Annuity Market in Europe," Books, Edward Elgar Publishing, number 3181.
    33. David A. Wise, 1985. "Pensions, Labor, and Individual Choice," NBER Books, National Bureau of Economic Research, Inc, number wise85-1, February.
    34. Mauro Mastrogiacomo & Rob Alessie & Maarten Lindeboom, 2002. "Retirement Behaviour of Dutch Elderly Households: Diversity in Retirement Patterns across Different Household Types," Tinbergen Institute Discussion Papers 02-073/3, Tinbergen Institute.
    35. Nicole Maestas, 2004. "Back to Work Expectations and Realizations of Work after Retirement," Working Papers WR-196, RAND Corporation.
    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. Vincenzo Galasso, 2012. "The Political Feasibility of Postponing Retirement," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(4), pages 27-31, December.
    2. J. Ignacio Conde-Ruiz & Vincenzo Galasso & Paola Profeta, 2005. "Early Retirement and Social Security: A Long Term Perspective," CESifo Working Paper Series 1571, CESifo.
    3. J. Ignacio Conde-Ruiz & Clara I. González, 2016. "From Bismarck to Beveridge: the other pension reform in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(4), pages 461-490, November.
    4. Gonzales-Eiras, Martín & Niepelt, Dirk, 2004. "Sustaining Social Security," Seminar Papers 731, Stockholm University, Institute for International Economic Studies.
    5. Heidler, Matthias & Raffelhüschen, Bernd & Leifels, Arne, 2006. "Heterogenous life expectancy, adverse selection, and retirement behaviour," FZG Discussion Papers 13, University of Freiburg, Research Center for Generational Contracts (FZG).
    6. George Kudrna & Alan D. Woodland, 2013. "Macroeconomic and Welfare Effects of the 2010 Changes to Mandatory Superannuation," The Economic Record, The Economic Society of Australia, vol. 89(287), pages 445-468, December.
    7. Vincenzo Galasso, 2012. "The Political Feasibility of Postponing Retirement," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(04), pages 27-31, December.
    8. repec:ces:ifodic:v:10:y:2012:i:4:p:19074540 is not listed on IDEAS

    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. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save Retirement May Backfire," Cahiers de Recherches Economiques du Département d'économie 05.05, Université de Lausanne, Faculté des HEC, Département d’économie.
    2. Bütler, Monika & Huguenin, Olivia & Teppa, Federica, 2004. "What Triggers Early Retirement? Results from Swiss Pension Funds," CEPR Discussion Papers 4394, C.E.P.R. Discussion Papers.
    3. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324, Elsevier.
    4. 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.
    5. Karakaya, Güngör, 2008. "Early cessation of activity in the labour market: impact of supply and demand factors," MPRA Paper 13390, University Library of Munich, Germany.
    6. 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.
    7. Warren, Diana A., 2015. "Retirement decisions of couples in Australia: The impact of spousal characteristics and preferences," The Journal of the Economics of Ageing, Elsevier, vol. 6(C), pages 149-162.
    8. Luca Spataro, 2002. "New Tools in Micromodeling Retirement Decisions: Overview and Applications to the Italian Case," CeRP Working Papers 28, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    9. Arnds, Pascal & Bonin, Holger, 2002. "Frühverrentung in Deutschland: Ökonomische Anreize und institutionelle Strukturen," IZA Discussion Papers 666, Institute of Labor Economics (IZA).
    10. Lalive, Rafael & Parrotta, Pierpaolo, 2017. "How does pension eligibility affect labor supply in couples?," Labour Economics, Elsevier, vol. 46(C), pages 177-188.
    11. Selin, Håkan, 2011. "What happens to the husband’s retirement decision when the wife’s retirement incentives change?," Working Paper Series, Center for Fiscal Studies 2011:8, Uppsala University, Department of Economics.
    12. Christelle Garrouste & Omar Paccagnella, 2011. "Shall I stay or shall I go? Late graduation and retirement decision," Post-Print hal-03245583, HAL.
    13. Daniel Hallberg & Matias Eklöf, 2010. "Do buy‐outs of older workers matter?," International Journal of Manpower, Emerald Group Publishing Limited, vol. 31(3), pages 337-359, June.
    14. Blau, David M. & Riphahn, Regina T., 1999. "Labor force transitions of older married couples in Germany," Labour Economics, Elsevier, vol. 6(2), pages 229-252, June.
    15. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-1180, September.
    16. Håkan Selin, 2017. "What happens to the husband’s retirement decision when the wife’s retirement incentives change?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 432-458, June.
    17. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    18. Robin L. Lumsdaine & David A. Wise, 1994. "Aging and Labor Force Participation: A Review of Trends and Explanations," NBER Chapters, in: Aging in the United States and Japan: Economic Trends, pages 7-42, National Bureau of Economic Research, Inc.
    19. Queiroz, Bernardo L. & Souza, Laeticia R., 2017. "Retirement incentives and couple’s retirement decisions in Brazil," The Journal of the Economics of Ageing, Elsevier, vol. 9(C), pages 1-13.
    20. JIMÉNEZ MARTÍN Sergi & LABEAGA José M. & GRANADO MARTINEZ Maite, 1999. "Health status and retirement decisions for older European couples," IRISS Working Paper Series 1999-01, IRISS at CEPS/INSTEAD.

    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:usg:dp2005:2005-09. See general information about how to correct material in RePEc.

    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: Joerg Baumberger (email available below). General contact details of provider: https://edirc.repec.org/data/vwasgch.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.