01 Aug 2005

Option Values for Retirement

Effects of Public Incentives to Postpone Retirement in Finland, Belgium and Germany

Hannu Piekkola / Matthias Deschryvere

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European Network of Economic Policy Research Institutes (ENEPRI) Research Report No. 14, 31 pages

This paper studies the determinants of the retirement transitions of Europeans and focuses on the impact of social security systems on retirement behaviour. The analysis uses the first eight waves (1994-2001) of the European Community Household Panel. Based on these survey data, option values – which express, for each retirement age, the trade-off between retiring now and keeping the option open for some later retirement date – are constructed for each sampled individual in three countries: Finland, Belgium and Germany. The overall results of the duration and probit models show that the option value, well-being at work and health all have a significant impact on retirement decisions irrespective of gender. The analysis shows that policies to raise marginal incentives and, hence, option values are effective, especially in Finland. The incentives have the highest impact on the early retirement stage. In Germany and Belgium we see spikes in retirement at age 60 or 65, whereas the retirement path in Finland is smooth from age 56 and option values do not significantly decrease with age. Job satisfaction is an important predictor of future withdrawal from work. Poor health also has an important effect on retirement risk, especially in Germany.