Labour supply effects of early retirement provision

• I estimate labour supply effects of an Early Retirement (ER) programme. • I characterise paths towards retirement and take account of benefit substitution. • 50% of ER pensioners would be working at the age of 66.5 had ER not been an option. • 70% would be working at the age of 63 had the age limit been 64 rather than 62. • Most of the benefit substitution is from disability insurance benefits. a b s t r a c t a r t i c l e i n f o JEL classification: H55 I38 J26 Keywords: Induced retirement Pension reform Matched employer–employee register data Difference-indifferences The main objective of this paper is to estimate labour supply effects of an early retirement programme in Norway. Detailed administrative data are employed in order to characterise full paths towards retirement and account for substitution from other exit routes, such as unemployment and disability insurance. By exploiting a reduction in the lower age limit for early retirement as a source of exogenous variation in individual eligibility I obtain robust difference-indifferences and triple differences estimates indicating that more than two out of three pensioners would still be working at the age of 63 had the age limit been 64 rather than 62. Hence, although successful in creating a more dignified exit route for early leavers, the programme also generated substantial costs in terms of inducing others to retire earlier. Over the last decades, the fiscal sustainability of public pension systems in most industrialised countries has been put under heavy pressure due to a combination of increased longevity and lower age at retirement. Although the trend towards early retirement now appears to have come to an end, life expectancy is still increasing, and more so than average age at retirement. Encouraging longer working lives is therefore one of the main pillars of recent policy advice from the OECD (see e.g. OECD (2011)), and reforms aimed at increasing the age at retirement are looming in most Western countries. With this need for reforms, the need for solid knowledge about the labour supply responses to changes in the incentive structures of retirement schemes is intensified. Many countries have programmes or institutions allowing different groups of workers to permanently retire prior to the normal retirement age. Public pension systems often operate with both an early retirement age and a normal retirement age, and unemployment and disability insurance …