ETLA/Piekkola 1 AIM Brussels, October 20 2008 Hannu Piekkola Flexible Pension System: Postponed Retirement and Distributional Fairness– Evidence from Belgium,

ETLA/Piekkola 1

AIM

Brussels, October 20 2008

Hannu Piekkola

Flexible Pension System: Postponed Retirement and Distributional Fairness–

Evidence from Belgium, Finland, Germany and Spain

The Research Institute of the Finnish Economy (ETLA) (and University of Vaasa)

Lönnrotinkatu 4B, FIN-00120 Helsinki. Fax: 358-9-601 753

E-mail: [email protected]

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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

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0.2

.4.6

.8R

etir

eme

nt t

rans

ition

s

54 56 58 60 62 64Age

Finland BelgiumGermany Spain

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

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Empirical Strategy•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

RETt= b0 + b1IMt + b2Satt + b3Health + b4Xt

+ t

Endogeneity problems solved using initial values for satisfaction and health

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Option value 0.88*** 0.88*** 0.82*** 0.91*** (-9.2) (-9.5) (-7.7) (-6.2) Option value spouse 0.99 0.98 1.00 (-0.6) (-0.4) (0.1) Pension wealth 1.01* 1.01* 1.03* 1.02+ (2.0) (2.2) (2.2) (1.8) Married 1.27 0.92 2.40 0.82 (1.0) (-0.9) (1.6) (-0.7) Employed spouse 0.90 1.16 0.74 (-0.7) (0.5) (-1.5) Male 1.12 1.16+ (1.3) (1.7) Age difference 1.01 1.01 1.00 (1.2) (1.6) (-0.1) Initial work satisfaction 0.96 0.96 0.92 0.99 (-1.3) (-1.1) (-1.5) (-0.4) Initial leisure satisfaction 1.07+ 1.06+ 1.03 1.08+ (1.8) (1.8) (0.5) (1.9) Initial bad health 1.38** 1.39** 1.00 1.73*** (2.9) (3.0) (0.0) (3.9) Initial bad health spouse 1.00 1.78 0.75 (-0.0) (1.6) (-0.7) Inpatient at hospital 1.69*** 1.69*** 1.46* 1.76*** (6.2) (6.2) (2.5) (5.5) Inpatient at hospital spouse 0.86 0.89 0.80 (-0.5) (-0.3) (-0.6) Observations 4871 4886 1732 3139

TABLE. DURATION MODEL, odds ratios

All Women Men

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Results 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

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Simulation of Net Present Value over Current

and Future Periods

•Compute the individual NPVZ (for a given individual i starting from year , Boldrin et al. (2002)

•Aggregate up individual NPVZs using the sample weights

= conditional probability of retirement at period A

= conditional probability of death at period A

10

( , ) ( )i i Ai Di AiA

NPVZ h A X Z h A Z

( , )ih A X

( )Dih A

ˆ(1, ) (1, )i ih X h X

ˆ( , ) (1 ( 1, )) ( , )h A X h A X h A X

for A=1

for A =2,…,11

AiZ , 1( , )i i AP A Y= pension wealth

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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?

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Replacement rates at 60 yrs by gender, country

Replacement rates decrease by 16%-point for women and by 11%-pointfor men, in Spain no minimum pensionReplacement rates below 40% unacceptable ?

0 % 5 % 10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

Spain, Female

Spain, Male

Germany, Female

Germany, Male

Belgium, Female

Belgium, Male

Finland, Female

Finland, Male

All, Female

All, Male

Replacement Rate % Replacement Rate After Pension Reform %

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Figure 1. Pension reform: pension wealth and option valuesFinland Belgium

24

68

1012

Fa

mily

Opt

ion

Val

ue

1015

2025

Fa

mily

Pe

nsio

n W

ealth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

510

1520

25F

am

ily O

ptio

n V

alue

05

1015

20F

am

ily P

ens

ion

Wea

lth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

Germany Spain

010

2030

Fa

mily

Opt

ion

Val

ue

010

2030

Fa

mily

Pe

nsio

n W

ealth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

010

2030

Fa

mily

Opt

ion

Val

ue

010

2030

Fa

mily

Pe

nsio

n W

ealth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

Source: Author calculations based on the ECHP 1994-2001

05

10

15

20

25

Opt

ion

Val

ue

51

01

52

02

53

0P

ens

ion

Wea

lth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

05

10

15

Opt

ion

Val

ue

68

10

12

14

16

Pe

nsio

n W

ealth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

Finland

SpainGermany

Belgium

24

68

10

Opt

ion

Val

ue

14

16

18

20

22

Pe

nsio

n W

ealth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

05

10

15

20

Opt

ion

Val

ue

51

01

52

0P

ens

ion

Wea

lth

54 56 58 60 62 64Age

Pension Wealth P.W. After ReformOption Value O.V. After Reform

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Figure 2. Pension reform and retirement age

Predicted retirement age 4.5 yrs laterMen benefit most, retirement posponed by 4.9 yrs

Column 1 2 3 4 5

Estimates by

Country

All Female 58.7 59.1 3.7 2.2 Lowest 3.0Male 58.9 58.8 4.9 0.8 Highest 6.9

Finland Female 59.4 60.0 1.0 3.0 Lowest 0.6Male 58.3 60.0 1.3 3.5 Highest 2.5

Belgium Female 56.6 59.0 6.7 -0.7 Lowest 4.7Male 57.9 57.1 6.7 0.5 Highest 7.8

Germany Female 58.3 57.9 5.2 5.7 Lowest 4.0Male 58.9 58.1 6.7 7.3 Highest 7.3

Spain Female 61.3 60.3 3.2 2.5 Lowest 1.8Male 59.6 59.5 3.2 1.6 Highest 7.9

Postponed Retirement (years)Retirement Age (Model Year 2000)

GenderRetirement Age (Year

2000)

Columns 3 and 5 are based on estimation in column 1 in table 1; column 4 uses estimation by country from table 2.

Household Pension Wealth

Quartile

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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?

0

5

10

15

20

25

30

35

Belgium Spain Finland Germany

Ne

t P

rese

nt

Va

lue

of

Pe

nsi

on

We

alth

in 1

0 0

00

€

NPV Pension Wealth, Q1 NPV Pension Wealth After Reform, Q1

NPV Pension Wealth, Q4 NPV Pension Wealth After Reform, Q4

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

0.2

.4.6

.81

0 5 10 15temp

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

0 5 10 15temp

Cumul. Wealth Cumul. Wealth After Pension Reform

Germany Spain

0.2

.4.6

.81

0 5 10 15 20temp

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

1 2 3 4 5temp

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

0 10 20 30 40 50NPV_PensionWealth

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

0 10 20 30NPV_PensionWealth

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

0 10 20 30 40 50NPV_PensionWealth

Cumul. Wealth Cumul. Wealth After Pension Reform

0.2

.4.6

.81

0 10 20 30 40NPV_PensionWealth

Cumul. Wealth Cumul. Wealth After Pension Reform

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Well-being at work or health improvement experiment

1. 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%)

2. Job satisfaction improves by 50% and leisure satisfaction decreases by equal amount

When people retire?

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Well-being and health reforms postponement of retirement

Health and well-being at work, leisure satisfaction: weak effects

GenderGreater job satis-faction and leisure dissatisfaction

Improved health

All Female 0.3 0.1Male 0.3 0.1

Finland Female 0.3 0.1Male 0.3 0.1

Belgium Female 0.2 0.1Male 0.2 0.0

Germany Female na 0.2Male na 0.2

Spain Female 0.3 0.1Male 0.3 0.1

1) 20% greater reported job satisfaction and lower leisure satisfaction (mean is 4.47 for job satisfaction and 3.93 for leisure satisfaction where scale is from 1 to 6).

Postponed retirement (years)

2) Share of individuals with self-reported bad health is halved from 12.3%.

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Policy conclusionsHigher 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)

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Policy conclusions•Health matters, but surprisingly little for retirement

•Investment in well-being at work important, but as a lifetime investment?