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RESEARCH PRODUCT

AN EXPERIMENTAL TEST ON RETIREMENT DECISIONS

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I. INTRODUCTION The reform of social security systems is now one of the main issues on the economic policy agenda of most industrialized countries. It is widely considered that, unless serious changes take place, the aging of the population implying a rise in the number of retirees relative to that of workers will threaten the viability, of pay-as-you-go public pension systems in the long run. This threat is being reinforced by the progressive reduction in the retirement age of the working population. The central reforms that are being proposed to neutralize these future financing problems are the raising of the contribution rate, the decreasing of pension benefits, or/and the delay of the retirement age. With reference to this latter reform, as Blondal and Scarpetta (1998) state, a direct way to encourage people to work longer would be to raise the pensionable age. But delaying the retirement age may not be very popular. According to recent surveys, most workers claim that they are happy with the current retirement age (see Cremer and Pestieau 2003). This may help to explain why reforms on the legal retirement age have currently become a very delicate matter for governments. (1) On the other hand, pension systems in virtually all Organization for Economic Cooperation and Development (OECD) countries in the mid-1990s made it financially unattractive to work after the age of 55, see Gruber and Wise (1997) or Blondal and Scarpetta (1998). Indeed, the general consensus in the theoretical literature related to social security and retirement decisions is that pension systems create enormous incentives to leave the labor force early. (2) Therefore, increasing the retirement age as a tool to improve the financial problems of public pensions systems faces two sensitive problems: the opposition of workers to a delay in the standard retirement age and the disincentives to continuous work being embedded in the pension system. The large decline in labor force participation is attributed to the specific fact that to keep on working implies a reduction in the present value of total pension benefits. The terms "old-age pension wealth" and "implicit tax on postponing retirement" have been frequently used to illustrate these disincentives in the pension system. The old-age pension wealth is the discounted value of expected pension benefits minus the discounted cost of obtaining such benefits. After the earliest age at which pensions can be accessed, working for an extra year may imply changes in this pension wealth by foregoing 1 yr of pensions, paying contributions for an additional year, and maybe increasing the pension benefits per year. Therefore, if the costs of postponing retirement are higher than the gains, then it is considered that the pension system is implicitly taxing to prolong the working period. That is, the drop in pension wealth acts as an implicit tax on income from continued work and as such is a clear incentive to retire early. Actually, reforms aiming to increase the effective retirement age to improve the financial problems of public pensions systems have mainly focused on the reduction of this implicit tax on prolonging the working period. It is also considered that when the increase in pension benefits is exactly offset by the higher cost in terms of contributions and forgone pensions, the pension system is not distorting the retirement decision. That is, the pension systems that are marginally actuarially fair will not distort individual decisions concerning retirement age, and, consequently, they are defined as neutral systems. For this reason, the main economic policy measures move in the direction of strengthening the link between lifetime contributions and pension benefits. (3) Indeed, this reform is one of the policy conclusions of Maintaining Prosperity in an Ageing Society, OECD (2000): " ... the most appropriate reform would be to allow people to retire at the age of their own choice and to adjust pension level so that the pension system is neutral on average. …