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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:

    [email protected]

    Copyright

    ?

    2004 John

    Wiley

    &

    Sons,

    Ltd.

    Received

    28

    May

    2003

    Revised

    27 November

    2003

    This content downloaded from 132.248.241.216 on Wed, 3 Sep 2014 15:42:14 PMAll use subject to JSTOR Terms and Conditions

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    740

    A. HEYMA

    100%

    -|-1

    90%

    -

    n

    Males

    84%

    Females

    80%

    -

    I

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    70%

    -

    eco/

    [=

    65%

    64%

    cc

    60%_

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    Age

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    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