jmp

Routes to Retirement: Pension Design, Health, and Occupation

Abstract: For those who can no longer work at older ages due to poor health or strenuous occupation, pension age increases will be ineffective at extending their working lives. I investigate potential targeted pension policies which aim to protect those incapable of work while extending the working lives of those who can. Estimating a dynamic structural model of occupational choice, health, and retirement on German microdata, I simulate counterfactual policy regimes, including exemptions based on health status or career history, and find that the cost of such a policy is set less by who it protects than by who it exempts by mistake. Exempting those a later pension age would not keep in work costs little, since their entitlements are small and the pension partly replaces disability or unemployment benefits they would have otherwise drawn. In contrast, exempting someone who would otherwise have worked costs far more, mostly in lost tax and social security contributions rather than pension payments themselves. Changes in career choices as a response to policies of this kind are present but modest, and the popularity of such policies depends on when you ask, providing the biggest welfare gains for older cohorts but having broadest popularity among middle-aged cohorts for whom they still provide insurance value.