Download - Early retirement schemes (2)
Early retirement schemes (2)To spare older workers, the pension funds introduced transitional schemes in which the
replacement rate depended on the date of birth. The moment of introduction and the exact
conditions varied by sector. The table below shows the replacement rates in the VUT scheme, the
transitional scheme and the prepension scheme for ABP, the pension fund of the government.
Note that the VUT scheme provided a clear incentive to retire at age 60, whereas the prepension
scheme is actuarially fair. A similar table is available for six other pension funds, which did not
introduce a prepension scheme during the period of investigation. We use the participants of
these pension funds as a control group.
Early Retirement Behaviour in the Netherlands
Evidence from a Policy Reform
Rob Euwals (CPB, IZA, CEPR), Daniel van Vuuren (CPB, VU University Amsterdam),
Ronald Wolthoff (Tinbergen Institute, VU University Amsterdam), [email protected]
Data & ModelIn the empirical analysis we use the Income Panel data set (IPO) of Statistics Netherlands. This
data set is based on administrative data from the Dutch National Tax Office and concerns the
period 1989 – 2000. The data set has a panel structure and contains information about 75
thousand individuals. We only consider the individuals aged between 55 and 65, which are
participant in one of the selected pension funds and which are not left-censored. This results in a
sample of 2973 individuals.
To estimate the effect of the transition to a prepension scheme, we use a duration model. The
duration of an individual is defined as the time that elapses between his 55th birthday and his
moment of retirement. We assume a mixed proportional hazard form and we estimate both the
baseline hazard and the unobserved heterogeneity nonparametrically.
A actuarially fair prepension scheme does not provide incentives to retire at specific ages. A VUT
scheme however provided two different incentives: an incentive to postpone retirement to
individuals younger than the standard retirement age and an incentive to retire to individuals older
than the standard retirement age. Therefore, we use two dummy variables to model the effect of
the transition from VUT to prepension: incentive to wait and incentive to retire.
AbstractThe Dutch labor force participation rate of elderly is among the lowest of Europe and early
retirement schemes play an important role. Already in the early 1990s, unions and employer
organizations recognized the adverse incentive effects of the generous and actuarially unfair
PAYG schemes and decided to transform these to less generous and actuarially fair capital
funded schemes. The starting dates of the transitional arrangements varied by sector. In this
study, we exploit the variation in starting dates to estimate the impact of the policy reform on early
retirement behavior. We use a large administrative dataset, the Dutch Income Panel of the
National Tax Office, to estimate hazard rate models for early retirement. We conclude that the
policy reform induces workers to postpone early retirement. Model simulations show that the
transitional scheme has already led to average retirement postponement by 8 months, which will
become almost a year once the transition is completed.
Results
SimulationUsing the estimation results we have simulated the distribution of the retirement age for the VUT,
the transitional and the prepension scheme (see graph).
Calculation of the average retirement age under the different schemes shows that the transitional
scheme has induced individuals to postpone retirement by on average 8 months. Under the
prepension scheme a further increase of this difference to 11 months can be expected.
0.000
0.100
0.200
0.300
0.400
0.500
0.600
0.700
0.800
55 56 57 58 59 60 61 62 63 64 65
Age
Ret
irem
ent
pro
bab
ilit
y (u
nco
nd
itio
nal
)
VUT Transitional Prepension
Early retirement schemes (1)
The VUT scheme was financed by a pay-as-
you-go (PAYG) system, which implied that its
sustainability was threatened by the ageing of
the Dutch population. Because of this, unions
and employer organizations decided to
transform the schemes to capital funded
schemes, the so-called prepension schemes.
These schemes are less generous: the
standard retirement age is higher and the
replacement rate is lower (see figures).
The first early retirement scheme in the
Netherlands was introduced in the late
seventies and was called the VUT
scheme. The exact conditions of this
scheme varied by sector, but a typical
scheme provided a benefit from age 60
until 65 that was equal to 80% of the last
earned wage. This replacement rate did
not increase if retirement was postponed,
so the scheme was not actuarially fair.
0%
10%
20%
30%
40%
50%
60%
58 59 60 61 62 63
Standard retirement age
Per
cen
tag
e
VUT Prepension
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
70% 71 - 75% 76 - 80% 80 - 85%
Replacement rate
Per
cen
tag
e
VUT Prepension
VUT Transitional Prepension
Date of retirem. < Apr.97 ’97-’03 > Apr.03 > Apr.97
Age/Date of birth < Apr.42 ’42-’47 < Apr.42 ’42-’47 > Apr.47
55 0 27 25 27 25 18
56 0 30 28 30 28 21
57 0 35 32 35 32 24
58 0 40 38 40 38 28
59 0 48 45 48 45 33
60 80 59 55 59 55 40
61 80 75 70 75 70 51
62 80 75 70 100 93 70
63 80 75 70 100 100 100
64 80 75 70 100 100 100
Coefficient Std error
Age 55 -5.70 * (0.60)
Age 56 -5.67 * (0.63)
Age 57 -5.09 * (0.62)
Age 58 -5.41 * (0.63)
Age 59 -4.47 * (0.63)
Age 60 -3.04 * (0.61)
Age 61 -0.50 (1.14)
Age 62 -1.41 (1.18)
Age 63+64 -1.72 (1.25)
Incentive to
retire
2.56 * (0.32)
Incentive to wait 0.32 (0.21)
The table on the right shows the
estimation results for the baseline hazard
and the two dummy variables. Incentive to
retire is significantly positive, which means
that individuals aged 60 and over had a
higher hazard rate in the VUT scheme
than in the prepension scheme. On the
other hand, incentive to wait is not
significant, implying that the transition had
no effect on individuals aged between 55
and 60.
Specifications with a double baseline (one
for the VUT scheme and one for the
transitional scheme) or with financial
variables like the pension wealth, the peak
value and the option value were also
estimated, but the performance of these
models was less.
