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A Structural Dynamic Analysis of Retirement Behaviour in the NetherlandsAuthor(s): Arjan HeymaSource: Journal of Applied Econometrics, Vol. 19, No. 6, The Econometrics of Social Insurance(2004), pp. 739-759Published by: Wiley

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JOURNAL

OF APPLIED ECONOMETRICS

J.

Appl

Econ.

19:

739-759

(2004)

Published online

in

Wiley

InterScience

(www.interscience.wiley.com).

DOI:

10.1002/jae.781

A

STRUCTURAL

DYNAMIC

ANALYSIS OF RETIREMENT

BEHAVIOUR IN THENETHERLANDS

ARJAN

HEYMA*

SEO

Amsterdam

Economics,

University

of

Amsterdam,

The Netherlands

SUMMARY

This

study

focuses

on

determinants

of

elderly

labour force

participation

and

retirement

decisions in the

Netherlands.

This is

analysed by

a

dynamic programming

model

for the simultaneous choice of retirement

age

and

route,

which

includes social

insurance and

private pensions,

eligibility

conditions

for

early

retirement,

lifecycle

wage

and

health

profiles,

and

layoffs. Special

attention is

given

to

opportunities

for and the effect of

participation policies. Results show that institutional structures of benefit and pension programmes are prime

determinants of

retirement,

particularly

eligibility

conditions and

potential

substitution between

exit

routes,

and that

dynamic

aspects

are

relevant for

understanding

retirement behaviour.

Copyright

?

2004

John

Wiley

&

Sons,

Ltd.

1.

INTRODUCTION

Recent

studies

on

retirement

behaviour,

for

example

by

Rust and

Phelan

(1997),

Benitez-Silva

et

al

(2000)

and

French

(2000),

have indicated

that

the labour

supply

decision of

elderly

workers is

best represented by

a

dynamic process inwhich traditional explanatory variables, such

as

earnings,

benefits,

pensions

and

health

conditions,

play

an

important,

but

not

exclusive,

role. Incentives

for

retirement

vary

between

ages,

depending

on

the

structure

of social

insurance,

pension provisions

and health insurance.

A

change

in

one

of these incentives has

consequences

that

depend

on

other

incentives within

that

structure

and

on

the influence of

uncertainty

about

future socio-economic

circumstances.

Policy

measures,

for

instance

to

increase labour

force

participation

of

the

elderly,

should

therefore

not

be

taken

in

isolation,

but

as

part

of

an

integral

policy

to

change

the structural

framework of

incentives for retirement.

Like in

many

other

OECD countries with

ageing populations,

the

urge

for

increasing

elderly

labour force

participation

is

high

in

the

Netherlands. Dutch

elderly

participation

rates

are

extremely

low.

In

1998,

only

20%

of

all males

aged

60

to

65

and

6%

of

all

females

aged

60

to

65

were

still

active

in

the

labour market.

For

people aged

55

to

60,

labour

force

participation

rates

were

65%

for

males

and

26% for females.

Compared

to

middle-aged

groups,

this

reflects

a

dramatic fall

in

participation

over

age.

Compared

to

the

OECD

average,

elderly

labour

force

participation

rates

were

around

20

percentage

points

lower

for

both

males

and females

(see

Figure

1).

Dependency

rates,

expressed

as

the

number

of

people

aged

50 and older

as

a

percentage

of

people

aged

20

to

49,

are

expected

to

increase from

65%

in

1998

to

109%

in

2030

(CBS,

1999a).

The

decline

in

elderly

labour force

participation

that

started

in

the

1950s induced researchers

to

consider retirement

as

a

special

case

of labour

force

participation

(Bowen

and

Finigan,

1969;

Feldstein,

1974;

Quinn,

1977).

Since

then,

the

modelling

approach

in the

retirement

literature

has

*

Correspondence

to:

Arjan Heyma,

SEO Amsterdam

Economics,

University

of

Amsterdam,

Roetersstraat

29,

1018

WB

Amsterdam,

The

Netherlands. E-mail:

arjanh@seo.fee.uva.nl

Copyright

?

2004 John

Wiley

&

Sons,

Ltd.

Received

28

May

2003

Revised

27 November

2003

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740

A. HEYMA

100%

-|-1

90%

-

n

Males

84%

Females

80%

-

I

uj

70%

-

eco/

[=

65%

64%

cc

60%_

^9%

I I

I

|

50%

I

H

45%

?

40%-

^M

^8%

?

30%

^m

|

^M

16%

0%

-I?I-^-^-^-^^

?r-l-^^^?

Age

15-54

Age

55-59

Age

60-64

Age

55-64

Age

55-64 OECD

Average

Figure

1.

Dutch

labour force

participation

rates,

1998. Source:

CBS

(1999b),

Labor Force

Survey

and

OECD

(1999),

Employment

Outlook.

changed

from static reduced

form

models

to

structural

dynamic programming

models.

Although

static models

are

able

to

explain

part

of retirement

behaviour

as a

result

of financial

incentives

and health

conditions

(Boskin

and

Hurd, 1978; Parsons,

1980),

the

theoretical

lifecycle

framework

in Feldstein

(1974)

made

it

clear

that

current

income levels

by

themselves

cannot

fully explain

retirement

patterns.

Future

income

opportunities

are

also

important.

Later,

Burkhauser

(1979)

and Burkhauser

and

Quinn

(1983)

showed that

lifecycle compensation

and

particularly

eligibility

structures

are

important explanatory

factors for retirement

behaviour.

Burkhauser

(1980)

found

that

not

just

annual

values,

but the

entire

stream

of future

earnings

is

a

major