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Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications

Author

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  • Timm Bönke
  • Daniel Kemptner
  • Holger Lüthen

Abstract

In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that retirement behavior is strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are about three times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns, if achieved by indiscriminating pension cuts, are associated with individual welfare losses that are more than twice as high.

Suggested Citation

  • Timm Bönke & Daniel Kemptner & Holger Lüthen, 2017. "Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications," Discussion Papers of DIW Berlin 1639, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1639
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    Cited by:

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    2. Andersen, Asbjørn Goul & Markussen, Simen & Røed, Knut, 2021. "Pension reform and the efficiency-equity trade-off: Impacts of removing an early retirement subsidy," Labour Economics, Elsevier, vol. 72(C).
    3. Lorenz, Svenja & Zwick, Thomas & Bruns, Mona, 2022. "Beware of the employer: Financial incentives for employees may fail to prolong old-age employment," The Journal of the Economics of Ageing, Elsevier, vol. 21(C).
    4. Mona Larsen & Peder J. Pedersen, 2017. "Labour force activity after 65: what explain recent trends in Denmark, Germany and Sweden? [Arbeitsmarktbeteiligung von über 65-Jährigen: Ursachen für die jüngsten Entwicklungstrends in Dänemark, D," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 50(1), pages 15-27, August.
    5. Laub, Natalie & Boockmann, Bernhard & Kroczek, Martin, 2023. "Tightening Access to Early Retirement: Who Can Adapt?," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277625, Verein für Socialpolitik / German Economic Association.
    6. Baldermann, Claudia & Salvati, Nicola & Schmid, Timo, 2016. "Robust small area estimation under spatial non-stationarity," Discussion Papers 2016/5, Free University Berlin, School of Business & Economics.

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    More about this item

    Keywords

    dynamic discrete choice; retirement; tax and pension system; pension reform;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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

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