1. Income Security Programmes and Retirement Behaviour in Ireland Roman Raab & Brenda Gannon Presented to the Annual Meeting of the IEA Belfast, April 24, Dr. Roman Raab Dr. Brenda Gannon Irish Centre for Social Gerontology/Department of Economics i3 Innovus, Stockholm NUIG (previously Irish Centre for Social Gerontology, NUIG)
Irish Centre for Social Gerontology

2. Motivation and Objective
Demographic changes threaten finances of pension systems in the OECD
Population ageing
Life expectancy at birth Ireland: males 76.8/ females 81.6 years
Trend into early retirement
Average retirement ages Ireland: males 65.2/ females 66.2 years
So far, no study on economic incentives coming from Irish income security programmes
Work Disincentives:
Older workers face work disincentives coming from income security programmes:
State Pensions
Occupational and private pensions
Social welfare programmes (unemployment compensation, disability benefit, )
Question: Is there a link between these programmes and retirement behaviour?
Gruber and Wise (1999; 2004)
Life cycle hypothesis: Modigliani and Brumberg (1954), Friedman (1957)
Ireland: no study so far
Irish Centre for Social Gerontology

3. Retirement Behaviour & Arrangements in Ireland
Retirement behaviour: pre-65/66 spikes in retirement hazards
Pension coverage:
Almost half the workforce (46%) depending on State Pension only
37% have additional occupational pension
Low coverage of private retirement saving plans (13%)
Irish Centre for Social Gerontology

4. Financial Incentives and Retirement
Income Security Wealth (ISW) = net present value of future lifetime retirement income
Per se a work disincentive
Incentive: higher ISW, higher work disincentive: “income effect”
Accrual (ACC) = gain or loss of ISW from postponing retirement for one more year
Is postponing retirement for one year rewarded or penalised?
Incentive: stay in labour force if ACC is positive or zero: “substitution effect”
Implicit Tax on Work (ITR) = This is the negative ratio of the accrual and potential net earnings from work during the year of postponing retirement
Interaction of ISW and potential earnings
The more positive the ITR, the higher the incentive to retire now
Irish Centre for Social Gerontology

5. Simulating Incentives for Stylised Cases in Ireland
Scenario 1: State Pension/Social Welfare only
46 percent of workforce covered
State Pension from age 65+
Pre-65: Social Welfare programmes, e.g., unemployment or disability benefits.
Scenario 2: State Pension//occupational pension
37 percent of workforce covered
Age 55 to 64: early retirement on an occupational pension
State Pension from age 65+.
For illustration: pension formula of Superannuation Scheme for Civil Servants
Calculation method: ISW, ACC, ITR for each possible age of retirement from 55 to 67
Discounted to planning age 55
By sex (different survival probabilities) and pre-retirement earnings level (age and sex specific)
Net of taxes, levies, and payroll taxes
Irish Centre for Social Gerontology

6. Financial Incentives – Income Security Wealth (Euros), by Sex
S1: relatively low (due to low State Pension), higher for females due to higher life expectancy
S2: strong income effect
Irish Centre for Social Gerontology

7. Financial Incentives – Accrual (Euros), by Sex
S1: negative accruals provide modest disincentive to work, loss of Euros 8, ,000 p.a. of deferred retirement
S2: very small accruals until age 65, no big incentive about timing of retirement
Irish Centre for Social Gerontology

8. Financial Incentives – Implicit Tax on Work (%), by Sex
S1: increasing disincentive as earnings increase
S2: lower than in S1 (due to lower accruals), negligible disincentive
Irish Centre for Social Gerontology

9. Conclusions for Ireland
No unique set of work disincentives, however, there seems to be a link between work disincentives and retirement
S1: modest incentive to retire as early as possible
S2: negligible accrual effect, but huge income effect
Policy options:
State Pension before age 65: if introduced, some pre-65 retirement increase likely, but not excessively (could be important in recession)
Income adequacy: proposed opting-out occupational pension should be neutral of work disincentives. Opting out seriously threatens income adequacy. Is flat-rate State Pension an up-to date solution?
More flexibility: might be important for people with severe health conditions and in health-deteriorating jobs (life expectancy below average)
Irish Centre for Social Gerontology

10. Outlook…Estimating retirement probabilities Living in Ireland Data
Irish Centre for Social Gerontology