Employer Pay Policies, Public Transfers and the Retirement Decisions of Men and Women in Denmark

The empirical retirement literature measures individual responses to variation in income flows due to public transfers, private individual or employer-provided pensions. The novelty of this paper is to provide a decomposition the incentive effects from these three sources. It is the first time that the effects of pay policies of different employers on retirement outcomes is explicitly modelled and empirically measured. A model of individual retirement is set up where employers may influence worker retirement age through pay policy. A conventional dynamic structural model is extended to allow both individual and employer heterogeneity. Empirically, identification of the employer effects on income and retirement is achieved by exploiting a longitudinal sample of Danish small-to-medium sized private sector establishments matched together with all of their workers. Identification of the effect of public transfers on income and retirement is through exogenous eligibility rules and reforms to a public early retirement programme. Employer specific compensation is found to be an important determinant of work and retirement income flows. However, employer effects on retirement age are only found among subsamples where access to public transfers is relatively limited. the original IDA database and made this work possible. The usual disclaimer applies. An ageing population, longer life expectancy and earlier exit from the labour force motivate interest in the determinants of retirement. Private pensions and public transfers are of increasing importance since they must finance the future consumption of a growing number of retirees for a greater proportion of their lifetime. Policy interest in early retirement is almost always motivated by the large consequences for public financing of social security (xxx, 1999). Less often remarked is the importance of early retirement to employers because of the human capital endowment that older workers represent (Wise, 1993). Pensions create incentives which may have consequences for retirement behaviour. The extensive retirement literature has focused largely on the incentive effects of public transfer The novelty of this paper is the coherent modelling of retirement incentives due to each source of pension income: personal-, employer-and publicly-provided. The emphasis is on the compensation policy of different employers as a retirement determinant, while coherently modelling public transfer incentive effects and allowing individual income and retirement heterogeneity. An employer may wish to determine the retirement age of workers for several reasons: It would facilitate labour force adjustments and allow the writing of efficient long-term labour contracts. Theories of efficient labour contracts address the agency …