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The Impact of an Increase in the Legal Retirement Age on the Effective Retirement Age

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Abstract

We analyze the impact of an increase in the legal retirement age on the effective retirement age in the Netherlands. We do this by means of a dynamic programming model for the retirement behavior of singles. The model is applied to new administrative data that contain very accurate and detailed information on individual incomes and occupational pension entitlements. Our model is able to capture the main patterns observed in the data. We observe that as individuals get older their labor supply declines considerably and this varies by age and gender. We simulate the current pension reform which aims at gradually increasing the legal retirement age from 65 to 67 and a hypothetical reform that immediately increases the retirement age to 67. The simulation results show a small impact on the effective retirement age for the first reform and a bigger impact for the second reform. Respectively, individuals postpone their retirement by \(<\)1 month and 7 months on average; while differences across individuals mainly depend on their gender and health status.

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Notes

  1. For instance, in 2005, single individuals received € 11,211 and cohabiting or married individuals € 7,980.

  2. CBS StatLine data for single individuals (including single parents).

  3. More details can be found in Rust and Phelan (1997).

  4. In principle, more preference shifters can be included in the analysis. However, given the particular data at hand, we faced a multicollinearity problem when we also included variables like health status.

  5. We do not have enough observations for individuals in the last class, so we have assumed that they share the same transition probabilities as individuals in the previous categorie (60–64 years old).

  6. Assumption based on projections of future pension incomes according to Statistic Netherlands.

  7. Individuals in the last category share the same transition probabilities as individuals in the previous category (60–64 years old).

  8. Note that individuals can receive a disability benefit while still working.

  9. For individuals older than 66, we assume that they have the same transition probabilities as individuals at this age.

  10. As often happens in this literature, we set the discount factor equal to 0.97. Though the discount factor is in principle identifiable, there is not sufficient variation in the data to effectively estimate the discount factor.

  11. The retirement age is increased even more for individuals below 58 years old. However, these cohorts are not included in the sample.

  12. Mastrobuoni (2009) finds that increasing the Normal Retirement Age (NRA) each year by 2 months (US reform), has an effect of 50 % for both men and women, which means that the average retirement age increases by 1 month every year. His identification strategy assumes that after controlling for labor, financial and demographic characteristics, any observed trend-discontinuity in the average retirement is due to the change in the NRA. This strategy captures not only the financial or wealth effect (response to the benefit cut implied by the increase in the NRA) but also the effect of social norms such as the fact that some workers look at the NRA as a focal point.

    Behaghel and Blau (2012) provide evidence of framing effects in retirement behavior by using a reform that increases the NRA from 65 to 66 in 2-month increments per year of birth. They find a relatively large impact on benefit claiming but a small impact on labor force exit behavior and self-reported retirement. The results, however, consider both the wealth effect and the behavioral effect.

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Acknowledgments

We thank the Editor Rob Alessie, two anonymous referees, Tobias Klein, Robert Olieman, Ward Romp and seminar participants at the Central Bank of Peru, the University of Piura, the SVB and a Netspar Pension Day for useful comments.

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Authors and Affiliations

  1. University of Piura, Street Martir Jose Olaya 162, Miraflores, Piura, Lima, Peru

    Noelia Bernal

  2. Netspar and CentER, Tilburg University, Tilburg, Netherlands

    Noelia Bernal

  3. Department of Economics, University of Leuven, Naamsestraat 69, 3000 , Leuven, Belgium

    Frederic Vermeulen

Authors
  1. Noelia Bernal
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  2. Frederic Vermeulen
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Correspondence to Frederic Vermeulen.

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Frederic Vermeulen gratefully acknowledges financial support from The Netherlands Organisation for Scientific Research (NWO) through a VIDI Grant and the Research Fund KU Leuven through the Grant STRT/12/001.

Noelia Bernal gratefully acknowledges financial support from Netspar and the Sociale Verzekeringsbank.

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Bernal, N., Vermeulen, F. The Impact of an Increase in the Legal Retirement Age on the Effective Retirement Age. De Economist 162, 115–145 (2014). https://doi.org/10.1007/s10645-014-9226-8

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