20.06.2023 |
Research
Changes in retirement age norm largely influence retirement decisions
A study by Jonathan Gruber, Ohto Kanninen, and Terhi Ravaska examines the effect of relabeling retirement ages in Finland on retirement rates and returning to work after retirement.
Long-run deficits in public pension systems are a common issue in developed countries, and a typical way of addressing this is changing retirement ages, as the retirement age in a system is strongly associated with retirement. Existing evidence implies that spikes in retirement rates right at the retirement age cannot be explained merely through changes in financial incentives, suggesting that there are other behavioral mechanisms at play in driving retirement. At the same time, contemporaneous changes in retirement ages and changes in financial incentives make it difficult to measure convincingly the impact of the retirement age norm itself.
A study by Jonathan Gruber (MIT and NBER), Ohto Kanninen (Labour Institute of Economic Research), and Terhi Ravaska (Tampere University and the VATT Institute of Economic Research) examines the effect of relabeling retirement ages in Finland on retirement rates and returning to work after retirement. The study utilizes a 2005 retirement reform in Finland that caused the early retirement age to change from 60 to 62 and the normal retirement age from 65 to 63 years, accompanied by only modest changes in financial incentives to retire. This allows the researchers to separate financial incentives and norms associated with retirement age.
The study finds that relabeling retirement ages causes an enormous and instant response in retirement rates that cannot be explained by the changes in financial incentives. Before the reform, the most popular age to retire was 65 years. After the reform, there is an immediate drop in retirement rates at 65 years, accompanied by a sharp increase in the age of retirement below 65. However, 65 years as a retirement age remains popular for several years after the reform, implying that the labels for “normal retirement age” are sticky and affect behavior for some time after they no longer apply. The researchers estimate a 47 percentage point increase in retirement rates due to relabeling.
In addition to responses retirement rates, the study also finds evidence consistent of “retirement regret” among those who responded to relabeling, measured through the changes in rates of return to work after retiring. Those who responded to relabeling were more likely to return to work after retirement than those unaffected by relabeling.
The results imply that changes to retirement ages may have a significant impact on retirement rates beyond changes in financial incentives. This, among other possible “nudges” affecting the retirement behavior, could offer the possibility of extending working lives without hurting those who need to retire earlier.
The article Relabeling, Retirement and Regret has been published in Journal of Public Economics, Volume 211, July 2022 (behind a paywall).
