March 29, 2011

Flexible Retirement

Flexible retirement - that is, the opportunity to choose one’s own personal retirement age - serves as a hedge against pension risk and provides insurance to workers facing health or productivity shocks. This paper discusses three conditions to provide insurance through flexible retirement.
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Flexible retirement and flexible pension schemes are in practice closely linked because of imperfect capital markets and institutional restrictions.

First, it should be possible to adjust the pension starting date at limited cost. This condition is gradually being fulfilled, as many countries are moving towards more actuarially neutral pension schemes.

Second, individuals should be willing to adjust their labour supply in case of a wealth shock. This condition seems largely fulfilled, although the available empirical evidence suggests that the framing of pension wealth is at least as important as the income effect.

Third, the labour market should be able to deal with flexible individual retirement decisions. This condition is gaining importance, but has not yet received much attention in the literature. Institutions often hamper employment past the ‘standard retirement age’. Moreover, the hiring rates of older workers are low and their unemployment duration is high. Institutional reforms facilitating flexible retirement opportunities are desirable from an insurance perspective.

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Daniel van Vuuren Read more