Social Security Causes Earlier Retirement
"Despite very different programs, cultural histories, labor-market institutions, and other social characteristics, the results consistently show that program incentives accord strongly with retirement decisions in all 12 countries."
Give male workers in industrial nations enough pension money to retire early, and they do. Delay the age at which they are eligible for retirement under national social security programs, and many older employees will keep working. Those are key findings of the second stage of an international research project to study the relationship between social security provisions and retirement. The project relies on the analyses of a large group of economists in 12 countries: Italy, Belgium, Denmark, Netherlands, France, United Kingdom, Germany, Spain, Canada, Sweden, Japan, and the United States.
A first stage of this project showed a strong relationship across countries between social security program incentives to retire and the proportion of older people out of the labor force. In Social Security Programs and Retirement Around the World: Micro Estimation (NBER Working Paper No. 9407), NBER Research Associates Jonathan Gruber and David Wise report on the second stage of the project, which investigates the effect of social security retirement incentives on retirement decisions within each of these 12 nations.
Despite very different programs, cultural histories, labor-market institutions, and other social characteristics, the results consistently show that program incentives accord strongly with retirement decisions in all 12 countries. In all nations, there is a sharp jump in the number of workers who retire in the year after they can first receive Social Security benefits, despite variation in that age across nations. Such a "spike" in retirement occurs, for example, at age 60 in France, but age 62 in the United States; in both cases, this accords with the initial availability of benefits. In general, those workers who face the strongest disincentive to continue work, in terms of lost Social Security benefits, are the ones most likely to retire. And the authors consistently find that those who have larger Social Security entitlements retire earlier than their national counterparts with lower entitlements.
Mathematical simulations for each country show that, on average across all 12 countries, a reform that delays first eligibility for benefits by three years would likely reduce the proportion of men aged 56 to 65 who are out of the labor force by between 23 and 36 percent. This may interest policymakers trying to figure out what to do about an anticipated difficulty in covering pension costs in the future. "Changes in the provisions of social security programs would have very large effects on the labor force participation of older employees," the authors note.
Another simulation looked at an illustrative "common reform" for the 12 nations, with eligibility for early retirement set at 60, normal retirement age at 65, and an actuarial reduction in benefits between ages 65 and 60. This plan would have very disparate effects on retirement across the countries, but the results square with what might be expected considering the provisions in the current social security programs of each nation. For instance, in the United States, age 62 is currently when men can first receive a Social Security pension. So the reform, pushing retirement back to age 60, would encourage more men to retire early. In Italy, the Netherlands, Belgium, France, and Germany, benefits are available well before age 60. So setting 60 as an age for early retirement would keep men in the labor force longer. Canada has an entitlement age of 60 for social security benefits, but at such a low level that the reform plan's actuarial provision would significantly increase benefit levels, inducing more reti rements.
-- David R. Francis
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