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AIM Brussels, October 20 2008

AIM Brussels, October 20 2008. Hannu Piekkola Flexible Pension System: Postponed Retirement and Distributional Fairness– Evidence from Belgium, Finland, Germany and Spain. OUTLINE OF PRESENTATION. Objectives Intragenerational distribution

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AIM Brussels, October 20 2008

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  1. AIMBrussels, October 20 2008 Hannu Piekkola Flexible Pension System: Postponed Retirement and Distributional Fairness– Evidence from Belgium, Finland, Germany and Spain

  2. OUTLINE OF PRESENTATION • Objectives • Intragenerational distribution • Small and potentially homogeneous political entities vs. large countries: FIN, BEL, GER, SPAIN, • ECHP data 1994-2000 • Pension incentives, non-wealthy, wealthy • Individuals and Couples • Financial incentives for those with poor health, job satisfaction • Experiments of Pension Reforms • Results • Conclusion

  3. Figure A.2 Age Profile of Retirement Transitions by Country.

  4. Duration model, Individual approach • LHS: retirement transition dummy • RHS: • Incentive measures (IM=Option Value, Family Pension Wealth) • Well-being at work (Sat= job and leisure satisfaction) • Health • Individual characteristics (X) • Error term e • RETt= b0 + b1IMt + b2Satt+ b3Health+ b4Xt + et • Endogeneity problems solved using initial values for satisfaction and health Empirical Strategy

  5. TABLE. DURATION MODEL, odds ratios All Women Men

  6. Option value • Postpones retirement • Spouse’s option value not very important • Pension Wealth • Incentives similar with low and high pension wealth • Well-being at work and satisfaction for leisure: • Health of importance for men (but at the end of work career) • Job (leisure) satisfaction is negatively (positively) related to retirement, but not very large effects Results

  7. Simulation of Net Present Value over Current and Future Periods = pension wealth = conditional probability of retirement at period A = conditional probability of death at period A for A=1 for A =2,…,11 • Compute the individual NPVZ (for a given individual i starting from year t, Boldrin et al. (2002) • Aggregate up individual NPVZs using the sample weights

  8. Pension reform experiment • Roughly the Finnish pension reform 2005 • Annual accrual rate is 1.5%-point for the 18-53 year age bracket, 1.9%-point for the 53-60 age group, 7%-point for the 61-68 age group with no limit • Working career (80% wage and 20% inflation indexation, etc.). Pension indexed by inflation, No minimum pension • No early retirement schemes, pension rights decreased annually by 5%-point for early retirement prior to age 62, maximum deduction 30% at age 56. When people retire and what are the distributional consequences?

  9. Replacement rates at 60 yrs by gender, country Replacement rates decrease by 16%-point for women and by 11%-point for men, in Spain no minimum pension Replacement rates below 40% unacceptable ?

  10. Finland Belgium Figure 1. Pension reform: pension wealth and option values Germany Spain

  11. Column 3 4 5 1 2 Postponed Retirement (years) Retirement Retirement Household Estimates Gender Age (Year Age (Model Pension Wealth by 2000) Year 2000) Quartile Country All Female 58.7 59.1 3.7 2.2 Lowest 3.0 Male 58.9 58.8 4.9 0.8 Highest 6.9 Finland Female 59.4 60.0 1.0 3.0 Lowest 0.6 Male 58.3 60.0 1.3 3.5 Highest 2.5 Belgium Female 56.6 59.0 6.7 -0.7 Lowest 4.7 Male 57.9 57.1 6.7 0.5 Highest 7.8 Germany Female 58.3 57.9 5.2 5.7 Lowest 4.0 Male 58.9 58.1 6.7 7.3 Highest 7.3 Spain Female 61.3 60.3 3.2 2.5 Lowest 1.8 Male 59.6 59.5 3.2 1.6 Highest 7.9 Columns 3 and 5 are based on estimation in column 1 in table 1; column 4 uses estimation by country from table 2. Figure 2. Pension reform and retirement age Predicted retirement age 4.5 yrs later Men benefit most, retirement posponed by 4.9 yrs

  12. Figure 4. Pension Wealth Before and After Pension Reform in Lowest (Q1) and Highest Quartile (Q4) in the Country In general distributional effects not too adverse?

  13. Figure 3. Cumulative Distr. of NPV of Pension Wealth Before and After Pension Reform

  14. Well-being at work or health improvement experiment • Share of workers feeling bad health and the share of those having had impatient care at hospital in past 12 months halved (10% to 5%) • Job satisfaction improves by 50% and leisure satisfaction decreases by equal amount When people retire?

  15. Well-being and health reforms postponement of retirement Health and well-being at work, leisure satisfaction: weak effects

  16. Policy conclusions • Higher pension right accruals 7% have real effects • Applied at the margin (raising incentives rather than costs) • Strongest effects in Belgium and Germany 6 yrs, Spain 3 yrs, but also in Finland 3 yrs using country-specific estimates • Changes in the distribution of pension wealth fair although static replacement rates at age 60 decrease over 10%-points: • Finland: all loose little • Belgium: all gain • Germany: all gain • Spain: non-wealthy loose (no minimum pension)

  17. Policy conclusions • Health matters, but surprisingly little for retirement • Investment in well-being at work important, but as a lifetime investment?

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