Pathways to Retirement and the Role of Financial Incentives in Sweden

We study how economic incentives affect the labor force exit of individuals through different income security programs, old-age pensions as well as income taxes in Sweden. We use the option value for staying in the labor force as a measure of economic incentives and estimate an econometric model for the choice of leaving the labor market. We consider two different pathways to retirement: the old-age pension path and the social insurance path. The latter includes Unemployment Insurance (UI), Sickness Insurance (SI) and Disability Insurance (DI), but we focus on the incentives provided by the DI program, which is the most important labor force exit path before age 65. By simulating the effect of different probabilities of receiving DI we show how changes in the stringency of DI admittance affect labor supply of older workers through economic incentives.