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Financial incentives and the timing of retirement [Elektronische Ressource] : empirical evidence from Switzerland and Germany / vorgelegt von Barbara Hanel

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163 pages
Financial Incentives and the Timing of Retirement Empirical Evidence from Switzerland and Germany Inaugural-Dissertation zur Erlangung der Würde eines Doktors der Wirtschafts- und Sozialwissenschaften (Dr. rer. pol.) der Friedrich-Alexander-Universität Erlangen Nürnberg vorgelegt von Barbara Hanel aus Worms Erstgutachterin: Prof. Regina T. Riphahn, Ph.D. Zweigutachterin: Prof. Dr. Gesine Stephan Disputation: 26. Januar 2010 Contents 1 Introduction .................................................................................................................. 1 1.1 Basic Principles of the Retirement Insurance Systems in Germany and Switzerland .............. 2 1.2 Demographic Change and Labor Market Trends in Germany and Switzerland ..... 6 1.3 Financial Incentives and Retirement Behavior ....................................................... 8 1.4 Organization of this Dissertation .......................................... 10 2 A Reform of Disability Pensions in Germany .......................................................... 14 2.1 Introduction ........................................................................... 14 2.2 Literature Review .................................. 17 2.3 Institutional Background ....................................................... 21 2.4 Hypotheses and Empirical Approach .................................................................... 23 2.5 Data and Descriptive Statistics ..............
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Financial Incentives and the Timing of Retirement
Empirical Evidence from Switzerland and Germany
Inaugural-Dissertation zur Erlangung der Würde eines
Doktors der Wirtschafts- und Sozialwissenschaften (Dr. rer. pol.)
der Friedrich-Alexander-Universität Erlangen Nürnberg
vorgelegt von
Barbara Hanel aus Worms
Erstgutachterin: Prof. Regina T. Riphahn, Ph.D.
Zweigutachterin: Prof. Dr. Gesine Stephan
Disputation: 26. Januar 2010




Contents
1 Introduction .................................................................................................................. 1
1.1 Basic Principles of the Retirement Insurance Systems in Germany and
Switzerland .............. 2
1.2 Demographic Change and Labor Market Trends in Germany and Switzerland ..... 6
1.3 Financial Incentives and Retirement Behavior ....................................................... 8
1.4 Organization of this Dissertation .......................................... 10
2 A Reform of Disability Pensions in Germany .......................................................... 14
2.1 Introduction ........................................................................... 14
2.2 Literature Review .................................. 17
2.3 Institutional Background ....................................................... 21
2.4 Hypotheses and Empirical Approach .................................................................... 23
2.5 Data and Descriptive Statistics .............. 27
2.6 Results ................................................................................................................... 33
2.6.1 Short-term and Long-term Effects of the Reform on Retirement Behavior .. 34
2.6.2 The Effect of Financial Incentives on Retirement Behavior .......................... 37
2.7 Conclusions ........................................................................................................... 40
2.8 Figures and Tables 42
3 A Reform of Old-Age Pensions in Switzerland ....................................................... 50
3.1 Introduction ........................................................................... 50
3.2 Institutional Background and Hypotheses ............................................................ 52
3.3 Data and Empirical Approach ............................................... 58
3.4 Results ................................................................................... 62
3.4.1 Baseline Results ............................................................. 62
3.4.2 Effects of Panel Attrition ............................................................................... 67
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3.4.3 Heterogeneity of Treatment Effects ............................................................... 69
3.5 Conclusions ........................................................................... 71
3.6 Figures and Tables ................................ 75
4 A Reform of Old-Age Pensions in Germany ............................ 89
4.1 Introduction ........................................................................................................... 89
4.2 The Recent Pension Reform in Germany .............................. 90
4.3 Literature and Hypotheses ..................................................................................... 93
4.4 Estimation Strategy ............................. 101
4.5 The Data .............................................................................................................. 111
4.6 Results ................. 117
4.7 Conclusions ......................................................................................................... 125
4.8 Figures and Tables .............................. 128
5 Summary and Conclusive Remarks ....................................................................... 139
Bibliography .................................................. 143

ii
List of Figures
Figure 1.1 Labor Force Participation Rates in Germany and Switzerland by Age
Group and Gender Over Time .................................................................. 13
Figure 2.1 Relative Frequency of Transitions to Disability Retirement Over Time ... 42
Figure 3.1 Relative Frequency of Transitions to Retirement by Age and Gender Over
Time .......................................................................................................... 75
Figure 3.2 Predicted Retirement Probability Before and After Reform by Level of
Education and Gender ............................................................................... 76
Figure 4.1 Age of Entitlement for Retirement Benefits by Month of Birth .............. 128
Figure 4.2 Relative Frequency of Age of Benefit Claiming by Birth Cohort and
Gender ..................................................................................................... 129
Figure 4.3 Employment Status at Given Ages by Birth Cohort 130
Figure 4.4 Net Present Value of Social Security Income by Age of Benefit Claiming
for Different Ages of Employment Exit (Hypothetical Employment
Biography) .............................................................................................. 131
Figure 4.5 INCB: Accrual in Social Security Wealth for One Year of Delay of
Retirement Entry by Gender, Year of Birth, and Age ............................ 132
Figure 4.6 Expected Survival Until Employment Exit and Until Benefit Claiming
Population at Risk by Spell Length and Gender ..................................... 133
Figure 4.7 Excess of the Number of Individuals out of Employment over the Number
of Individuals Receiving Benefits by Age and Gender ........................... 134


iii
List of Tables
Table 2.1 Timing and Anticipation of the Reform of Disability Pensions .................. 43
Table 2.2 Explanatory Variables – Descriptive Statistics ............................................ 44
Table 2.3 Financial Incentive Variables, Mean over Time (in Euro) .......................... 45
Table 2.4 Estimation Results (Random Effects Logit Estimator) ................................ 46
Table 2.5 Wald-Tests ................................................................... 47
Table 2.6 Estimation Results: Health Effects (Random Effects Logit Estimator) ...... 48
Table 2.7 Estimation Results: Effects of Financial Variables ..................................... 49
Table 3.1 Regular Retirement Age and Early Retirement Options after the 1991
Reform ...................................................................................................... 78
Table 3.2 Descriptive Statistics .................................................................................... 79
Table 3.3 Comparison of Control and Treatment Group Characteristics 80
Table 3.4 Alternative Logit Estimators ........................................................................ 81
Table 3.5 Estimation and Prediction Results – Random Effects Logit (Discrete
Distribution) .............................................................................................. 82
Table 3.6 Placebo-Analysis: Estimation and Prediction Results – Random Effects
Logit (Discrete Distribution) ..................................................................... 84
Table 3.7 Alternative Multinomial Logit Estimators ................................................... 85
Table 3.8 Prediction Results Based on Multinomial Logit Estimation with Random
Effects (Discrete Distribution) .................................................................. 86
Table 3.9 Results oft he Hausman Test of the IIA Property ........ 87
Table 3.10 Random Effects Logit Estimation: Heterogeneity of Incentive Effects .... 88
Table 4.1 Average Marginal Effects of Covariates on Transition Rates to Benefit
Claiming and out of Employment ........................................................... 135
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Table 4.2 Total Effects of the Reform on Transition Rates by Gender ..................... 137
Table 4.3 Total Effects of the Reform on the Expected Duration Until Benefit
Claiming and Employment Exit .............................................................. 138

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1 Introduction
The political debate in the western world about sustainable financing of old-
age income lasts already several decades. Both, pre-funded private pensions and
public pensions, which are usually financed in the framework of pay-as-you-go
(PAYG) systems, each imply specific problems and risks. Fund-based pensions
1depend on the overall development of asset values, whereas PAYG-pensions depend
on demographic developments and labor market trends. Public pension schemes have
2to cope with increasing longevity and decreasing fertility, which in turn lead to an
increase of expenditures and a decline of revenues. Moreover, individual labor market
behavior affects the financial situation of PAYG-financed pension schemes: if
individuals extended their working life according to their increasing life expectancy,
the financial problems caused by demographic trends could be alleviated. Yet, the
reverse is observed in reality: labor force participation among the elderly has been
decreasing in most industrialized countries since the 1960s, thereby further
aggravating the effects of the demographic trend.
Public pension schemes set incentives either to stay in or to withdraw from the
labor force. By setting incentives to retire early, pension systems may exacerbate the
financial problems they face. This work examines the effect of financial incentives
that are caused by public pension schemes on the timing of retirement. It provides
evidence from Germany and Switzerland. In both countries, pension systems have

1 For example, private pension funds lost 23% of their investment’s value on average in the OECD in
2008, due to the financial crisis (OECD, 2009a).
2 Longevity among older individuals increased strongly in the OECD since the 1960s. The remaining
life expectancy of individuals aged 65 rose by one fourth in the OECD. It was 20.1 years for females
and 17.6 years for males by 2006. At the same time, fertility rates averaged to 1.65 across OECD
countries in 2006, which is far below the level that ensures population replacement (OECD, 2009b).
1
recently undergone reforms. The resulting changes of financial incentives to retire are
used to evaluate the effects of social security systems on labor market behavior.
1.1 Basic Principles of the Retirement Insurance Systems in Germany and
Switzerland
In most OECD countries, there is a mix of different schemes that provide
income for the elderly. Usually, there is a first pillar of the public pension system that
provides a basic income for the elderly. A second, earnings-related pillar shall provide
an adequate income relative to previous earnings. Moreover, some countries provide
subsidies for voluntary private savings as a third pillar. Yet, public pension systems
vary widely across countries in terms of their generosity. Compared to other OECD
countries, Germany and Switzerland provide moderate old-age benefits on average.
For example, in the UK the maximum public pensions from the first and the
second pillar sum up to only 50% of the average income. (Bäcker et al., 2008). The
3net replacement rate amounted to 40.1% for an average earner in 2006. Hence,
additional private savings are essential to prevent poverty during old-age. In
comparison to that, the public pension system e.g. in the Netherlands is generous. In
2006, the net replacement rate was 103.5% for an average earner. The public pension
systems of Germany and Switzerland range in the middle of these two extremes, with
4net replacement rates of 61.3% (Germany) and 64.5% (Switzerland) (OECD,

3 Here, the net replacement rate is defined as the amount of net benefits relative to the most recent net
earnings.
4 The pension system in Switzerland is based on two pillars, and it is ambiguous whether the second
pillar can be interpreted as part of the public system or as a private scheme, since it has characteristics
of both (see below). For an average earner, 38.9% of the pension income is drawn from the second
pillar on average, and 61.1% from the purely public first pillar. I follow the description in OCED
(2009a) where both pillars are considered a part of the public pension system.
2