1. ETLA/Piekkola 1 AIM Brussels, October 20 2008 Hannu Piekkola Flexible Pension System: Postponed Retirement and Distributional Fairness– Evidence from Belgium, Finland, Germany and Spain

2. ETLA/Piekkola 2 OUTLINE OF PRESENTATION Objectives Intragenerational distribution Small and potentially homogeneous political entities vs. large countries: FIN, BEL, GER, SPAIN, ECHP data 1994-2000 Pension incentives, non-wealthy, wealthy Individuals and Couples Financial incentives for those with poor health, job satisfaction Experiments of Pension Reforms Results Conclusion

3. ETLA/Piekkola 3 Figure A.2 Age Profile of Retirement Transitions by Country.

4. ETLA/Piekkola 4 Empirical Strategy Duration model, Individual approach LHS: retirement transition dummy RHS: Incentive measures (IM=Option Value, Family Pension Wealth) Well-being at work (Sat= job and leisure satisfaction) Health Individual characteristics (X) Error term  RET t = b 0 + b 1 IM t + b 2 Sat t + b 3 Health + b 4 X t +  t Endogeneity problems solved using initial values for satisfaction and health

5. ETLA/Piekkola 5 TABLE. DURATION MODEL, odds ratios AllWomenMen

6. ETLA/Piekkola 6 Results  Option value Postpones retirement Spouse’s option value not very important Pension Wealth Incentives similar with low and high pension wealth Well-being at work and satisfaction for leisure: Health of importance for men (but at the end of work career) Job (leisure) satisfaction is negatively (positively) related to retirement, but not very large effects

7. ETLA/Piekkola 7 Simulation of Net Present Value over Current and Future Periods Compute the individual NPVZ (for a given individual i starting from year , Boldrin et al. (2002) Aggregate up individual NPVZs using the sample weights = conditional probability of retirement at period A = conditional probability of death at period A for A=1 for A =2,…,11 = pension wealth

8. ETLA/Piekkola 8 Pension reform experiment Roughly the Finnish pension reform 2005 Annual accrual rate is 1.5%-point for the 18-53 year age bracket, 1.9%-point for the 53-60 age group, 7%-point for the 61-68 age group with no limit Working career (80% wage and 20% inflation indexation, etc.). Pension indexed by inflation, No minimum pension No early retirement schemes, pension rights decreased annually by 5%-point for early retirement prior to age 62, maximum deduction 30% at age 56. When people retire and what are the distributional consequences?

9. ETLA/Piekkola 9 Replacement rates at 60 yrs by gender, country Replacement rates decrease by 16%-point for women and by 11%-point for men, in Spain no minimum pension Replacement rates below 40% unacceptable ?

10. ETLA/Piekkola 10 Figure 1. Pension reform: pension wealth and option values Finland SpainGermany Belgium

11. ETLA/Piekkola 11 Figure 2. Pension reform and retirement age Predicted retirement age 4.5 yrs later Men benefit most, retirement posponed by 4.9 yrs

12. ETLA/Piekkola 12 Figure 4. Pension Wealth Before and After Pension Reform in Lowest (Q1) and Highest Quartile (Q4) in the Country In general distributional effects not too adverse?

13. ETLA/Piekkola 13 Figure 3. Cumulative Distr. of NPV of Pension Wealth Before and After Pension Reform

14. ETLA/Piekkola 14 Well-being at work or health improvement experiment 1. Share of workers feeling bad health and the share of those having had impatient care at hospital in past 12 months halved (10% to 5%) 2. Job satisfaction improves by 50% and leisure satisfaction decreases by equal amount When people retire?

15. ETLA/Piekkola 15 Well-being and health reforms postponement of retirement Health and well-being at work, leisure satisfaction: weak effects

16. ETLA/Piekkola 16 Policy conclusions Higher pension right accruals 7% have real effects Applied at the margin (raising incentives rather than costs) Strongest effects in Belgium and Germany 6 yrs, Spain 3 yrs, but also in Finland 3 yrs using country-specific estimates Changes in the distribution of pension wealth fair although static replacement rates at age 60 decrease over 10%-points: Finland: all loose little Belgium: all gain Germany: all gain Spain: non-wealthy loose (no minimum pension)

17. ETLA/Piekkola 17 Policy conclusions Health matters, but surprisingly little for retirement Investment in well-being at work important, but as a lifetime investment?