Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications

32 Pages Posted: 9 Feb 2017

See all articles by Timm Bönke

Timm Bönke

Free University of Berlin (FUB) - Department of Business and Economics

Daniel Kemptner

German Institute for Economic Research (DIW Berlin)

Holger Lüthen

German Institute for Economic Research (DIW Berlin)

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Date Written: January 2017

Abstract

In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that retirement behavior is strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are about three times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns, if achieved by indiscriminating pension cuts, are associated with individual welfare losses that are more than twice as high.

Keywords: Dynamic discrete choice, retirement, tax and pension system, pension reform

JEL Classification: C61, H55, J26

Suggested Citation

Bönke, Timm and Kemptner, Daniel and Lüthen, Holger, Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications (January 2017). DIW Berlin Discussion Paper No. 1639, Available at SSRN: https://ssrn.com/abstract=2914223 or http://dx.doi.org/10.2139/ssrn.2914223

Timm Bönke

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

Daniel Kemptner (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Holger Lüthen

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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