-

Labor Market

'Employees are ready for flexible pensions'

If employees are given the choice of when they can retire, they are very much influenced by the amount of pension they can expect to receive. Two-thirds of them are very interested in the option of semi-retirement, if it is available. “If it was up to employees, then a flexible pension system could be introduced today,” concludes Arthur van Soest of Tilburg University.

Press release 19-08-2013

Together with his colleague Hana Vonkova of Charles University in Prague, Van Soest researched the preferences of employees in the Netherlands with regard to their retirement age. A representative sample group of respondents aged 25 and older were presented with various scenarios, in 2006, 2007, and 2008. For this, the researchers used the CentERpanel, the internet panel of research institute CentERdata, which consists of 2,000 households who complete a weekly questionnaire. Their answers suggest that people respond very markedly to financial incentives. Both higher pay for working longer, in the form of higher pensions, and higher penalties for retiring early lead immediately to a deferment of the preferred retirement date.

Not maximum

This does not mean that employees select the option with the maximum financial benefit. In one of the scenarios, the participants were given the choice of retiring at any time between the ages of 60 and 70. Depending on the retirement age, the pension payments gradually increased, with that at the age of 65 being 70 per cent of the final salary. If no subsequent payments or penalties apply – for taking later or earlier retirement – the average age chosen by employees turned out to be 65.1, even though they could have achieved a higher pension by working longer.

Distribution

“The differences between employees can be significant, however,” says Van Soest. “In this scenario, around one fifth stated their wish to retire at 63 or earlier, while a similar proportion selected 67 or later. So the distribution is quite wide.” The distribution remains wide if the financial incentives are modified. On average, though, the trends are clear. If pension payments are raised by 10 per cent across the board, then the average selected retirement age falls by three months: an income effect. If the ‘bonuses and penalties’ for later or earlier retirement are reduced by half, then the average selected retirement age falls by no less than ten months.

Inevitable

Van Soest and Vonkova have described their research in the article "How Sensitive are Retirement Decisions to Financial Incentives? A Stated Preference Analysis", which has been accepted for publication by the Journal of Applied Econometrics. The study is relevant to the current discussions about the future of the Dutch pension system. “It is inevitable that the system will become more flexible,” believes Van Soest. “Generally speaking, this is something employees are also ready for. We have shown that their choices are influenced by changes in pension levels, and by the change to those levels when the retirement age is altered.”