Early retirement schemes (2)To spare older workers, the pension funds introduced transitional schemes in which the

replacement rate depended on the date of birth. The moment of introduction and the exact

conditions varied by sector. The table below shows the replacement rates in the VUT scheme, the

transitional scheme and the prepension scheme for ABP, the pension fund of the government.

Note that the VUT scheme provided a clear incentive to retire at age 60, whereas the prepension

scheme is actuarially fair. A similar table is available for six other pension funds, which did not

introduce a prepension scheme during the period of investigation. We use the participants of

these pension funds as a control group.

Early Retirement Behaviour in the Netherlands

Evidence from a Policy Reform

Rob Euwals (CPB, IZA, CEPR), Daniel van Vuuren (CPB, VU University Amsterdam),

Ronald Wolthoff (Tinbergen Institute, VU University Amsterdam), wolthoff@tinbergen.nl

Data & ModelIn the empirical analysis we use the Income Panel data set (IPO) of Statistics Netherlands. This

data set is based on administrative data from the Dutch National Tax Office and concerns the

period 1989 – 2000. The data set has a panel structure and contains information about 75

thousand individuals. We only consider the individuals aged between 55 and 65, which are

participant in one of the selected pension funds and which are not left-censored. This results in a

sample of 2973 individuals.

To estimate the effect of the transition to a prepension scheme, we use a duration model. The

duration of an individual is defined as the time that elapses between his 55th birthday and his

moment of retirement. We assume a mixed proportional hazard form and we estimate both the

baseline hazard and the unobserved heterogeneity nonparametrically.

A actuarially fair prepension scheme does not provide incentives to retire at specific ages. A VUT

scheme however provided two different incentives: an incentive to postpone retirement to

individuals younger than the standard retirement age and an incentive to retire to individuals older

than the standard retirement age. Therefore, we use two dummy variables to model the effect of

the transition from VUT to prepension: incentive to wait and incentive to retire.

AbstractThe Dutch labor force participation rate of elderly is among the lowest of Europe and early

retirement schemes play an important role. Already in the early 1990s, unions and employer

organizations recognized the adverse incentive effects of the generous and actuarially unfair

PAYG schemes and decided to transform these to less generous and actuarially fair capital

funded schemes. The starting dates of the transitional arrangements varied by sector. In this

study, we exploit the variation in starting dates to estimate the impact of the policy reform on early

retirement behavior. We use a large administrative dataset, the Dutch Income Panel of the

National Tax Office, to estimate hazard rate models for early retirement. We conclude that the

policy reform induces workers to postpone early retirement. Model simulations show that the

transitional scheme has already led to average retirement postponement by 8 months, which will

become almost a year once the transition is completed.

Results

SimulationUsing the estimation results we have simulated the distribution of the retirement age for the VUT,

the transitional and the prepension scheme (see graph).

Calculation of the average retirement age under the different schemes shows that the transitional

scheme has induced individuals to postpone retirement by on average 8 months. Under the

prepension scheme a further increase of this difference to 11 months can be expected.

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

55 56 57 58 59 60 61 62 63 64 65

Age

Ret

irem

ent

pro

bab

ilit

y (u

nco

nd

itio

nal

)

VUT Transitional Prepension

Early retirement schemes (1)

The VUT scheme was financed by a pay-as-

you-go (PAYG) system, which implied that its

sustainability was threatened by the ageing of

the Dutch population. Because of this, unions

and employer organizations decided to

transform the schemes to capital funded

schemes, the so-called prepension schemes.

These schemes are less generous: the

standard retirement age is higher and the

replacement rate is lower (see figures).

The first early retirement scheme in the

Netherlands was introduced in the late

seventies and was called the VUT

scheme. The exact conditions of this

scheme varied by sector, but a typical

scheme provided a benefit from age 60

until 65 that was equal to 80% of the last

earned wage. This replacement rate did

not increase if retirement was postponed,

so the scheme was not actuarially fair.

0%

10%

20%

30%

40%

50%

60%

58 59 60 61 62 63

Standard retirement age

Per

cen

tag

e

VUT Prepension

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

70% 71 - 75% 76 - 80% 80 - 85%

Replacement rate

Per

cen

tag

e

VUT Prepension

VUT Transitional Prepension

Date of retirem. < Apr.97 ’97-’03  > Apr.03 > Apr.97

Age/Date of birth   < Apr.42 ’42-’47 < Apr.42 ’42-’47 > Apr.47

55 0 27 25 27 25 18

56 0 30 28 30 28 21

57 0 35 32 35 32 24

58 0 40 38 40 38 28

59 0 48 45 48 45 33

60 80 59 55 59 55 40

61 80 75 70 75 70 51

62 80 75 70 100 93 70

63 80 75 70 100 100 100

64 80 75 70 100 100 100

Coefficient Std error

Age 55 -5.70 * (0.60)

Age 56 -5.67 * (0.63)

Age 57 -5.09 * (0.62)

Age 58 -5.41 * (0.63)

Age 59 -4.47 * (0.63)

Age 60 -3.04 * (0.61)

Age 61 -0.50 (1.14)

Age 62 -1.41 (1.18)

Age 63+64 -1.72 (1.25)

Incentive to

retire

2.56 * (0.32)

Incentive to wait 0.32 (0.21)

The table on the right shows the

estimation results for the baseline hazard

and the two dummy variables. Incentive to

retire is significantly positive, which means

that individuals aged 60 and over had a

higher hazard rate in the VUT scheme

than in the prepension scheme. On the

other hand, incentive to wait is not

significant, implying that the transition had

no effect on individuals aged between 55

and 60.

Specifications with a double baseline (one

for the VUT scheme and one for the

transitional scheme) or with financial

variables like the pension wealth, the peak

value and the option value were also

estimated, but the performance of these

models was less.