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Non-financial Determinants of Retirement: A Literature Review

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Abstract

Retirement is often concentrated at specific ages—in particular the ‘normal retirement age’ and an ‘early retirement age’. Financial incentives cannot fully explain this. Moreover, the participation effect of a higher normal retirement age importantly exceeds the encompassing income effect. Based on a literature survey, we conclude that social norms, default options, and reference-dependent utility are likely explanations for the individual propensity to retire at specific retirement ages. Further empirical research on non-financial determinants of retirement is needed to fully understand individual retirement behavior.

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Notes

  1. The discussion so far abstracts from the presence of a pension scheme.

  2. This is the magnitude of the income effect. The study disentangles the income effect from the price effect as both are affected in the reform. The price effect is found to be larger. This implies that the price effect could explain retirement peaks in past pension schemes with actuarial unfair benefits. As the income effect is smaller, it is more difficult to explain shifts in retirement peaks as a consequence of a rise in the statutory retirement age.

  3. It has been argued that many studies even overestimate the pension wealth effect on retirement (Ooijen et al. 2010). If individuals have at least some freedom of choice in their pension wealth, then a high preference for retirement will go together with high pension wealth. This combination of a parameter (preference) and explanatory variable (change in pension wealth) causes an endogeneity problem that is often not properly taken into account in empirical research.

  4. In the following we assume that retirement is an ‘absorbing state’. In other words, individuals make the transition from working life to retirement once in their life-times. Kantarci and Van Soest (2008) show that older workers prefer to work fewer hours, but are unable to do this. Apparently, employers or institutions constrain the option of working less and thus of phased retirement. It is likely that when individuals do retire later on, they will remain retired.

  5. Preliminary data of Statistics Netherlands show that this trend continues markedly after 2009: the peak at age 60 disappears, and the peaks at 62 and 65 show a further increase.

  6. Since the end of the 1990s, the VUT schemes were gradually replaced by so-called flexible pension schemes (FPS). The introduction of a new law in 2006 (in Dutch: wet VPL) accelerated the transition towards the new FPS’s, and in fact the VUT schemes were abolished from that year. These FPS schemes were capital-funded and largely actuarially fair, and therefore hardly generated implicit subsidies or taxes for deviation from the standard retirement age.

  7. Van Erp et al. (2013) explain the shift in the collective labor agreements in finer detail.

  8. The retirement peak at age 65 may be related to financial incentives as the actuarial fairness in the FPS schemes was largely established between early retirement ages, but in general not when retirement was postponed until after the state pension age. Take-up after the age of 65 may lead to either a loss or a gain of early retirement benefits, as the result of a different fiscal regime after this age.

  9. Note that this figure may give a somewhat less complete picture for the US than Fig. 1 for the Netherlands. Retirement in the US is a less absorbing state than in the Netherlands. Maestas (2010) shows that at least 26 % of the retirees returns to work (‘unretires’) later in life.

  10. The data set is composed of permanent federal civil service personnel for the Department of Defense during the fiscal years of 1982 through 1996.

  11. Hanel and Riphahn (2012) achieve a comparable result based on a Swiss reform that entailed an increase in the normal retirement age in the (first-pillar) public pension scheme for women of ages 62–64 years.

  12. Behncke (2012) (page 2) contains a list of references.

  13. Fouarge et al. (2012) find a preference for partial retirement.

  14. In the US, individuals between the early and normal retirement age are subject to an earnings test. Suppose an individual prefers retirement in November and already worked the past year. It is conceivable that earned income crosses the threshold and finds his benefits reduced. The individual may then prefer postponing retirement until next year, for which the soonest possibility is January.

  15. Defaults, reference points and social norms sometimes overlap. For instance, the standard renewal of insurances acts as a default, but also as a reference point.

  16. Hyperbolic discounting has provided valuable insights into some empirical puzzles with respect to consumption and saving. However, policy simulations with life-cycle models show that, compared with neoclassical individuals, hyperbolic discounters react not very differently to a change in the retirement age and is not an important answer to the ‘retirement peak puzzle’ (see Gustman and Steinmeier (2010) and Van Erp (2011)). An exception is Diamond and Köszegi (2003), which is a theoretical attempt to introduce the retirement decision within a traditional hyperbolic discounting framework of consumption and savings. They show that the undersaving caused by hyperbolic discounting model may result in a postponed retirement if people are poor enough (See van Erp et al. (2013) for further details).

  17. The fiscal regimes before and after the Dutch state pension age differ. This makes retirement-age decisions even more complicated and increases the relevance of financial illiteracy.

  18. This may be rational to the extent that transaction costs are involved.

  19. Procrastination and time inconsistent preferences are discussed in Sect. 4.4.

  20. The underlying identifying assumption relies on the attribution of changes in the claiming hazard to changes in the full retirement age (FRA). The authors test for other changes during the period such as the Delayed Retirement Credit and abolition of the earnings test of Social Security at the FRA. They conclude that the impact of reaching the FRA itself is much larger than these other factors.

  21. This does not mean that each neoclassical framework excludes an external context. As a synthesis, individuals could optimize (neoclassical framework) conditionally on their reference points. In that case, deviations from the reference point determine utility.

  22. A beneficial effect of social norms may be their role as coordination device. For instance, employer and employee can start thinking about a reasonable retirement age with a ‘socially accepted’ retirement age as a starting point. This might lead to efficiency gains.

  23. Social interactions may complement the importance of social norms. For instance, retirement of coworkers, that worked many years with the individual, could influence the disutility of working and in turn have an impact on the individual retirement decision.

  24. For instance, Duflo and Saez (2002) show that an individual’s participation in a retirement plan is affected by the participation of his or her direct colleagues.

  25. It is difficult to distinguish empirically between social norms and habits, even with survey data. If many people have the same habit, then it could be interpreted as a social norm. On the other hand, a social norm may lead to individual habit formation.

  26. They offer various explanations for the shift in retirement peaks following the reform in Social Security. They contemplate social norms as well as reference dependence. They distinguish between the explanations by relating the findings to cognition.

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Authors and Affiliations

  1. CPB, Netspar, The Hague, The Netherlands

    Frank van Erp & Daniel van Vuuren

  2. CPB, Netspar, Tilburg University, The Hague, The Netherlands

    Niels Vermeer

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  1. Frank van Erp
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Correspondence to Niels Vermeer.

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The authors thank Michiel Blom, Machiel van Dijk, Rik Dillingh, Rob Euwals, Lyda den Hartog, Johannes Hers, Adrie Moons, Henk Nijboer, Maarten van Rooij, Arthur van Soest, Bas ter Weel, Ed Westerhout and anonymous referees for useful comments. The authors thank the Ministry of Social Affairs and Employment and Netspar for research funding.

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van Erp, F., Vermeer, N. & van Vuuren, D. Non-financial Determinants of Retirement: A Literature Review. De Economist 162, 167–191 (2014). https://doi.org/10.1007/s10645-014-9229-5

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