International Evidence on Social Security and Retirement

NBER Reporter: Fall 2000

International Evidence on Social Security and Retirement

On June 1 and 2, the NBER held a conference on social security systems and retirement around the world as part of a cross-national research effort to compare retirement income programs in a dozen developed countries, including the United States, and to evaluate how the various programs affect retirement decisions. In each country, demographic changes have placed increasing financial pressure on the social security systems, a situation that is compounded by an increasing number of workers who retire young.

An earlier phase of this same project culminated in a widely cited NBER volume on Social Security and Retirement Around the World, published by the University of Chicago Press in 1999. For each country, the book has a chapter describing the social security policy, the work and retirement incentives associated with that policy, and the age-specific patterns of retirement in that country. This initial set of studies suggests that the retirement policies themselves contribute to earlier retirement by often providing generous retirement benefits at young ages and imposing large financial penalties on labor earnings beyond the age of eligibility for retirement benefits. As a result of these policy incentives, there is a strong correspondence between the age at which benefits are available in each country and the age at which people tend to leave the labor force.

The June conference completed a second phase in this collaborative research effort. In this phase of the project, researchers from each country used micro-data (data on individuals and their labor force decisions) to model the incentive structure of the retirement systems and their effects on retirement more formally. Specifically, they asked how the provisions of the social security programs -- interacting with the past and potential future earnings possibilities of individuals -- influence the decisions about work and retirement that people make.

The micro-models consider the "accrual value" of social security for individuals as they age: the discounted value of any additional (or lost) social security benefits that people will obtain (or lose) by continuing to work. For most workers, and in most countries, the accrual value becomes negative at some age because workers must give up social security benefits without a compensating increase in their future benefit amounts if they continue to work. In studies presented at the June conference, investigators applied models to what might be gained from social security from working for more years. They show that forward-looking accrual measures are important influences on work and retirement decisions.

In every country, the micro-data analyses demonstrate a strong relationship between the social security provisions and retirement behavior. In the statistical estimations, the timing of retirement is influenced significantly by the accrual of benefits in the social security program. Simple simulations for each country also demonstrate how changes in the social security programs can lead to in some cases dramatic changes in retirement behavior. This has important implications for the design and reform of social security programs that can effectively accommodate the demographic changes of the coming decades.

The international social security project is directed by NBER Research Associates Jonathan Gruber, MIT, and David Wise, Harvard University. In addition to Gruber and Wise, the following people participated in the conference and presented work from their respective countries: Alain Jousten and Sergio Perelman (Belgium); Michael Baker and Kevin Milligan (Canada); Paul Bingley, Nabanita Gupta, and Peder Pedersen (Denmark); Didier Blanchet and Ronan Mahieu (France); Axel Börsch-Supan and Reinhold Schnabel (Germany); Agar Brugiavini (Italy); Takashi Oshio (Japan); Arie Kapteyn and Klaas de Vos (Netherlands); Sergi Jimenez-Martin and Franco Peracchi (Spain); Marten Palme and Ingemar Svensson (Sweden); Richard Blundell (United Kingdom); and Courtney Coile (United States).

The collection of studies presented at the conference will be published by the University of Chicago Press in The Effect of Social Security and Retirement: Evidence from Around the World. In advance of publication, these papers will be available at Books in Progress.

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