Netspar - Flexible combinations of work and retirement

Department(s)/ Research Infrastructure
Public Economics
Project Status
Current Project
Project Duration
since/from 2015 to 2018
Commissioned by
European Kommission
Funded by
Netspar
Project Team/Contacts at DIW Berlin

The demographic change challenges pay-as-you-go funded pension insurance systems around the world. In particular, the aging of the population increases the group of pension recipients while the group of working contributors decreases. Therefore, most OECD countries have reversed their retirement policies since the 1990s and started to encourage longer working lives to alleviate the decline of the working age population. More recently, new policies aim to incentivize later retirement entry by enabling more flexible transitions into retirement through partial retirement regimes of flexible rules. So far, several European countries have introduced partial retirement programs into their public pension systems and other countries, including Germany, are in the process to make retirement more flexible.

The employment effects and the related fiscal effects of more flexibility in the pension system through partial retirement are ambiguous. On the one hand, partial retirement provides incentives to extend the working life for individuals who otherwise would exit employment through early retirement paths. On the other hand, partial retirement might decrease employment if full time working individuals who otherwise would work until the normal retirement age. The overall employment effects strongly depend on the design of partial retirement regimes. The central question of this project is how different partial retirement schemes affect labor supply, public balances and the distribution in pension income.

We analyze this question in the German context. The German government is currently in the process of introducing partial retirement through the “Flexi-Rente” (flexible retirement, FR) which will become effective in July 2017. For our analysis, we use a dynamic structural retirement model that incorporates the option for partial retirement. In the model, individuals maximize the present discounted utility of consumption and leisure by making annual decisions between continuing to work in a full-time position or leaving this employment state through one of three potential retirement paths: (1) regular retirement, (2) partial retirement, and (3) retirement through bridge unemployment. We use high quality administrative Biographical Data of Social Insurance Agencies in Germany (BASiD) which provides information on full employment histories, earnings, and pension accrual. Using the estimated parameters from the model, we simulate different counterfactual partial retirement regimes. Based on the outcome of these simulations we evaluate the overall efficiency of partial retirement as a policy tool to increase employment of elderly as well as improve fiscal balances and the distribution of pension income.