Income Security Programmes and Retirement Behaviour in Ireland Roman Raab & Brenda Gannon Presented to the Annual Meeting of the IEA Belfast, April 24, 2010 Dr. Roman Raab Dr. Brenda Gannon Irish Centre for Social Gerontology/Department of Economics i3 Innovus, Stockholm NUIG (previously Irish Centre for Social Gerontology, NUIG) Email: roman.raab@nuigalway.ie Email: gannon.brenda@gmail.com Irish Centre for Social Gerontology

Motivation and Objective Demographic changes threaten finances of pension systems in the OECD Population ageing Life expectancy at birth Ireland: males 76.8/ females 81.6 years Trend into early retirement Average retirement ages Ireland: males 65.2/ females 66.2 years So far, no study on economic incentives coming from Irish income security programmes Work Disincentives: Older workers face work disincentives coming from income security programmes: State Pensions Occupational and private pensions Social welfare programmes (unemployment compensation, disability benefit, ) Question: Is there a link between these programmes and retirement behaviour? Gruber and Wise (1999; 2004) Life cycle hypothesis: Modigliani and Brumberg (1954), Friedman (1957) Ireland: no study so far Irish Centre for Social Gerontology

Retirement Behaviour & Arrangements in Ireland Retirement behaviour: pre-65/66 spikes in retirement hazards Pension coverage: Almost half the workforce (46%) depending on State Pension only 37% have additional occupational pension Low coverage of private retirement saving plans (13%) Irish Centre for Social Gerontology

Financial Incentives and Retirement Income Security Wealth (ISW) = net present value of future lifetime retirement income Per se a work disincentive Incentive: higher ISW, higher work disincentive: “income effect” Accrual (ACC) = gain or loss of ISW from postponing retirement for one more year Is postponing retirement for one year rewarded or penalised? Incentive: stay in labour force if ACC is positive or zero: “substitution effect” Implicit Tax on Work (ITR) = This is the negative ratio of the accrual and potential net earnings from work during the year of postponing retirement Interaction of ISW and potential earnings The more positive the ITR, the higher the incentive to retire now Irish Centre for Social Gerontology

Simulating Incentives for Stylised Cases in Ireland Scenario 1: State Pension/Social Welfare only 46 percent of workforce covered State Pension from age 65+ Pre-65: Social Welfare programmes, e.g., unemployment or disability benefits. Scenario 2: State Pension//occupational pension 37 percent of workforce covered Age 55 to 64: early retirement on an occupational pension State Pension from age 65+. For illustration: pension formula of Superannuation Scheme for Civil Servants Calculation method: ISW, ACC, ITR for each possible age of retirement from 55 to 67 Discounted to planning age 55 By sex (different survival probabilities) and pre-retirement earnings level (age and sex specific) Net of taxes, levies, and payroll taxes Irish Centre for Social Gerontology

Financial Incentives – Income Security Wealth (Euros), by Sex S1: relatively low (due to low State Pension), higher for females due to higher life expectancy S2: strong income effect Irish Centre for Social Gerontology

Financial Incentives – Accrual (Euros), by Sex S1: negative accruals provide modest disincentive to work, loss of Euros 8,000- 10,000 p.a. of deferred retirement S2: very small accruals until age 65, no big incentive about timing of retirement Irish Centre for Social Gerontology

Financial Incentives – Implicit Tax on Work (%), by Sex S1: increasing disincentive as earnings increase S2: lower than in S1 (due to lower accruals), negligible disincentive Irish Centre for Social Gerontology

Conclusions for Ireland No unique set of work disincentives, however, there seems to be a link between work disincentives and retirement S1: modest incentive to retire as early as possible S2: negligible accrual effect, but huge income effect Policy options: State Pension before age 65: if introduced, some pre-65 retirement increase likely, but not excessively (could be important in recession) Income adequacy: proposed opting-out occupational pension should be neutral of work disincentives. Opting out seriously threatens income adequacy. Is flat-rate State Pension an up-to date solution? More flexibility: might be important for people with severe health conditions and in health-deteriorating jobs (life expectancy below average) Irish Centre for Social Gerontology

Outlook…Estimating retirement probabilities Living in Ireland Data Irish Centre for Social Gerontology