Lessons from a structural dynamic analysis of retirement behavior in the Netherlands

The labor force participation of elderly people in the Netherlands is extremely low. In addition, the share of elderly people in the population will increase substantially in coming decades. This leads to two major concerns: the availability of sufficient and qualified labor, and the affordability of (social) benefit programs. This study provides insights in the determinants of elderly labor force participation and factors that influence early retirement decisions. It contains an empirical analysis of wages, benefits and pensions, health conditions and retirement decisions of elderly individuals. The analysis of retirement decisions is performed by means of a dynamic programming model for the simultaneous choice of retirement age and retirement route (early retirement, disability and unemployment), which includes the structure of Social Insurance and private pension schemes, eligibility conditions for early retirement, life cycle wage and health profiles, and layoff probabilities. Special attention is given to (behavioral) factors that can be influenced by policy, and the effectiveness of a number of policy measures. Important lessons from the analysis are that the institutional structure of benefit and pension programs are prime determinants of retirement behavior, particularly eligibility conditions and potential substitution between exit routes, and that dynamic aspects are relevant for understanding and affecting retirement behavior, but special care must be taken in how dynamics are included in the analysis.