Pension incentives to retire Edward Whitehouse Slovenia, June 2007

Agenda When can people retire? Retirement incentives Sensitivity analysis Policy implications

Normal pension age FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Pension eligibility age for men

Normal pension age FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Pension eligibility age for men

Normal pension age: women FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Pension eligibility age for women

Retirement windows FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Pension eligibility age (early/normal) for men

Retirement duration FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Average: 17.7 years Additional life expectancy at normal pension age, men, 2004 Eurostat data

Retirement duration: men, FRA MLT SVK HUN EST CZE LAT LIT SVN PRT GRC LUX JPN ITA BEL SWE ESP FIN AUT DEU CYP POL NLD IRL GBR DNK USA Average: 19.9 years Additional life expectancy at normal and early pension ages, men, 2004 Eurostat data

Measuring incentives to retire Relationship between incomes in and out of work: out of work: retirement pension in work: earnings ratio of the two is the conventional ‘replacement rate’ But extra work can give extra pension entitlement Captured by the ‘change in pension wealth’ from working longer pension wealth is present value of future pension receipts an implicit tax/subsidy on remaining in work Level of pension wealth also matters Focus on age 60-64

Change in pension wealth Age 60-64, average earner, entry at LUX HUN NLD ESP POL AUT FIN DEU CZE JPN EST DNK SVK GBR IRL LAT FRA ITA SVN LIT CYP USA PRT SWE BEL GRC MLT Annualised; per cent of annual earnings

Level of pension wealth Age 60, average earner, entry at GBR JPN IRL USA POL LIT DEU LAT SVK EST BEL FIN CZE FRA SWE CYP DNK ITA AUT HUN PRT SVN NLD ESP LUX GRC MLT Pension wealth at age 60, multiple of annual earnings

Pension wealth: changes and levels

Conclusions – incentives Early retirement permitted with low (e.g. Hungary, Portugal) or zero (e.g. Belgium, Greece, Luxembourg) reduction in benefits Zero or too small increments for people deferring retirement (e.g. France, Slovenia, Spain) Earnings tests that prevent people combining work and pension (e.g. Belgium, Ireland, Malta, Luxembourg) Systems that require contributions even when little or no extra benefit is earned (e.g. maximum number of years in Belgium, Greece, Spain, United States) Resource tests can encourage retirement at earliest opportunity for low earners (e.g. France, Portugal, Sweden) Benefit formulae with higher pension accruals at younger ages (e.g. Spain) or pensions based of ‘final’ or ‘best’ earnings, which encourage people to retire once pay has peaked (e.g. Greece, Spain)

Contact information Edward Whitehouse ELS/SPD OECD 2 rue Andre Pascal Paris Cedex 16 France Internet: