Average retirement age

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Theoretical framework

The challenge of maintaining attractiveness in the labour market goes beyond the increasing longevity and lower fertility rates (Onder & Pestieau, 2014). There are far more factors and variables which may be underlying reasons and therefore contribute to why elderly decide to leave the labour force prior to the withdrawal age. Our research will be examined with the help of previous research and studies within the field, to get a better understanding of the relevant concepts in order to justify any conclusions based upon results from the empirical analysis. The following sections will lay the foundation for the empirical model and the variables of interest.

Pension Replacement Rates

Most countries have pension schemes in place to ensure that workers will have a source of income when entering retirement. Pension replacement rates are often used to compare pension entitlements to final earnings before exiting the workforce. As explained by OECD (2017b), pension replacement rates are used to measure pension income adequacy and the efficiency of the pension system.
While gross pension replacement rates reflect the design of the pension system, net pension replacement rates reflect the individual’s disposable income when entering retirement (OECD, 2017b; Barr & Diamond, 2006). Because of this, net replacement rates have a greater impact on the individual’s decision to exit the labour force and are therefore considered important for this paper. These will be included as a variable in the regression model to help reflect the financial setting of retirement decisions.
In some OECD countries, individuals are able to follow the development of their future pension benefits and are able to make informed decisions of how long they want to continue working (Swedish Pension Agency, 2019). Palmer (2000) shows how an individual’s replacement rate increase with the number of years present in the labour force, which could encourage workers who wish to increase their pension benefits to continue working. The author presents evidence that individual replacement rate can increase from 35% at 62 years old, to 50% at 68 years old (Palmer, 2000). Improving replacement rates are part of the default contribution rate mechanism that has been introduced in some OECD countries (OECD, 2018b). These are meant to simplify the decision of pension plans for individuals and work as automatic enrolment contributions until individuals opt to exit their pension plan. Changing the default option to participate in pension schemes instead of having individuals signing up to be part of the pension system has increased pension system coverage. These changes have currently been implemented in eight OECD countries both for self-employed workers and employees.¹ The objective is to increase pension scheme participation among workers to increase coverage, maintain pension system sustainability and help ensure retirement adequacy (OECD, 2018b).
Chybalski and Marcinkiewicz (2015) argue that pension replacement rates only cover one dimension of pensions – consumption smoothing – and highlight another relevant factor of retirement, hindering pension income inadequacy. The authors address the problem of how pension adequacy is measured, which is now solely based on the individual’s income over a lifetime. This creates a problem as it does not consider the individual’s consumption level, which if taken into account, would give a more accurate view of the pension adequacy (Chybalski & Marcinkiewicz, 2015).

Education

The structure of work at older ages and the pathway to retirement look different among developed countries. There are some countries in which high-educated prime-age workers work more compared to low-educated workers. When reaching older ages close to retirement, multiple developed countries experience that low-educated workers work more compared to high-educated individuals. This suggests that high-educated workers either reduce their working hours more quickly or enter full retirement at an earlier age compared to low-educated workers (OECD, 2017b). The impact of education is present when it comes to determining how well prepared an individual is for retirement. Since low levels of financial knowledge contribute to the problem of irrational retirement decisions, measures have been adopted by policy makers to improve the financial knowledge of individuals and sustainability of pension systems. These measures include financial education initiatives and aim to help workers make more informed retirement decisions throughout their working lives to ensure retirement adequacy. The OECD International Network on Financial Education has developed guidelines and frameworks to promote financial education and improve financial well-being of individuals. (OECD 2018b)
The Transamerica Institute (2016) presents evidence that people who have been attending college in the U.S are more ready to enter retirement. This is as they have greater access to retirement benefits and also contribute more than non-college students, which increases their lifetime savings. Hence, being educated gives financial stability which also affects one’s retirement income. Another important aspect of the survey is that individuals who had a higher level of educational attainment also believed they would live longer. Hence, the level of education is believed to be positively related to retiring more comfortably (Transamerica Institute, 2016).
Another aspect of education is the ability to reach a higher level of occupation, something which Humphrey et al. (2003) address as a great factor of early retirement. In their study they found evidence of early retirement to have characteristics of similar nature, such as having a degree, having a higher-level occupation such as managerial or professional occupation, and the last characteristics were that many had their own private pension plan (Humphrey et al., 2003). Education indicates some form of financial stability, compared to individuals with no education at all. This indicates a greater ability for individuals’ to be able to retire prior to the withdrawal age. The ability to educate oneself on financial sustainability is highly dependent on the institutional setting in a country and the opportunities that exist. The availability of general education as well as financial education has a great impact on retirement readiness and helps to maintain a well-functioning pension system (OECD, 2018b). Hence, the institutional settings in a country highly affects average retirement ages as well as the individual’s ability to prepare for retirement. Based on this, the regression model will include a level of education attainment which corresponds to a common financial knowledge across all OECD member states.

 Retirement ages

Pension policies and norms differ among the OECD member states. Some OECD countries allow workers to withdraw from their pension plans before the normal retirement age, at the so called withdrawal age. Other countries have introduced mandatory retirement ages, allowing employers to set an age at which employees have to retire (OECD, 2017b). Considering the different compositions of national pension systems, it is hard to determine universal measurements for withdrawal and mandatory retirement ages.
Mandatory retirement ages give employers the option to terminate contracts of older workers, even though the workers might want to remain in the workforce. Seven OECD member states² have abolished mandatory retirement while the rest still have some form of it present in their current pension systems. In those OECD countries where mandatory retirement ages still exist, new or extended employment contracts then have to be constructed to allow the worker to remain in the workplace. This is something that hinders older workers from working beyond normal retirement ages even though they might be physically able to do so (OECD, 2017b).
OECD (2017b) investigate the different variations in withdrawal ages among the member states, as well as the differences between men and women. Some countries do not allow early retirement in any mandatory part of the pension system, while other countries allow early retirement in the private or earnings-related pension systems. In Sweden for example, workers can access their earnings-related pensions from age 61 but do not receive their public pension before age of 65 (OECD, 2017b). In 2016, early retirement ages spanned from 50 to 65 years across the OECD countries whereas the normal retirement age spanned from 58 to 67 years. Some countries show no difference between the early retirement age and the normal retirement age but in most countries they differ by a few years. The countries with higher normal retirement ages also display a higher withdrawal age, suggesting a positive relationship between the two. Worth noticing however is that a lower early retirement age does not always result in a lower normal retirement age, both Australia and Japan have a normal retirement age of 65 while their early retirement ages equals 55 and 60 respectively (OECD, 2017b). Considering that the withdrawal age is merely a benchmark for when workers can start taking out their pension, it cannot operate as the sole determinant for the actual retirement age. The paper highlights private pension plans as another major factor determining the possible pension age for workers (OECD, 2017b).
Humphrey et al. (2003) give further insight into individual pension plans and how these affect the retirement age. In their empirical study of workers aged 50-69, the authors found that 40 percent expect to retire at the normal retirement age while 25 percent expected to retire earlier. The authors found that the people most prominent to expect early retirement to be those highly educated, those in higher professional positions and those with some form of private pension plan, whether in a scheme or through private savings. They also found that men were more likely than women to be expecting to retire before the normal retirement age (Humphrey et al., 2003).
The age of retirement age represents the institutional setting in a country, considering it displays how well-functioning a pension system is as well as individual’s ability to enter retirement. A vital question for policy makers who wish to extend working lives is therefore how to construct restrictions and flexibilities in the pension system to increase the labour force participation of older workers. Offering a greater flexibility might motivate workers to continue working part-time while receiving some pension benefits while it could also encourage those who currently retire late to decrease their working hours. Some countries have already introduced part-time retirement in which older workers are encouraged to continue working part-time while receiving some pension benefits. This mechanism is in place to further encourage older workers to remain in the workforce and help postpone full retirement to keep the pension system intact with growing retirement cohorts (OECD, 2017b).

Work characteristics

A highly important aspect when it comes to retirement decision is the working conditions of elderly. As Böckerman and Ilmakunnas (2017) states, being unsatisfied at work made 61.8 percent consider entering retirement prior to the withdrawal age. Among individuals satisfied at work, only 21 percent thought about entering retirement prior to the withdrawal age. The authors continue to prove that job satisfaction and retirement age are related considering it may induce individuals to retire earlier than if one is satisfied with their work (Böckerman & Ilmakunnas, 2017).
As del Mar Salinas-Jiménez, Artés and Salinas-Jiménez (2010) addresses, there are many factors which can work as motivation and increase our satisfaction with life. Two of those factors which are believed to be positively related to greater satisfaction of life is income and health (del Mar Salinas-Jiménez, Artés & Salinas-Jiménez, 2010). These factors give us an indication of why an individual would keep on working, or not keep on working. Since a greater level of income can help increase retirement income it is believed to, to a certain extent, improve life satisfaction and standard of living. OECD (2017b) addresses the fact that income levels of older people are on average lower than the rest of the population. In 2014, Estonia had the lowest income of older people with a value of 66.5 percent while France had the highest value of 103.4 per cent for elderly aged over 65 years old (OECD, 2017b). However, measuring working characteristics and their impact on the retirement of elderly is difficult. Due to this limitation, there won’t be a variable which represents working characteristics in the regression. However, the impact of working characteristics will be taken into consideration when interpreting the results and drawing conclusions.
A variable which will be taken into account in the regression is the average income of the working age population. This will be an indicator of an individual’s financial stability as well as the financial setting in a country, and hopefully give an understanding if there is a relationship between average income and average retirement ages. The level of financial stability has proven to be a major determinant when it comes to the age at which one exists the labour force, considering it highly affects the choice of pension plan. This in turn translates working income and gives a view of pension adequacy (Barr & Diamond, 2006; Humphrey et al., 2003). However, there is no clear indication of how a higher income affects the average retirement age. What can be noted however, is that an increase in income often leads to an increase in access to retirement benefits which in turn can affect the average retirement age negatively (Transamerica Institute, 2016). As most pension systems within the OECD also encourage private pension plans or private pension savings (OECD, 2017b), higher levels of income will help increase the opportunities to participate in these.

Health conditions

Increases in life expectancies source from health improvements during the industrialization, such as personal hygiene and developments of public health systems (Cutler et al., 2006; Soares, 2007). Anxo et al. (2017) discuss how overall improvements in life expectancies have resulted in better health for elderly, more precisely individuals above age 65. They argue that these elderly therefore have a higher work capacity compared to previously and a larger share of elderly should be able to work after the “natural” age of retirement, previously at 65 years for developed countries. Current trends show that the natural retirement age seems to move towards 68 for the cohorts born after the Second World War. Deciding at which age to retire can now be argued to depend more on the health of the individual worker as compared to a few decades ago (Anxo et al., 2017). Since the old-age dependency ratio reflects the proportion of elderly to the working age population in a country (OECD, 2017b), this measurement is used to capture the demographic shifts that comes with improved health of elderly.

1 Introduction 
2 Background 
2.1 Life expectancy
2.2 Pension systems
2.3 Average retirement age
3 Theoretical framework 
3.1 Pension Replacement Rates
3.2 Education
3.3 Retirement ages
3.4 Work characteristics
3.5 Health conditions
4 Methodology 
4.1 Data and summary statistics
4.2 Model
5 Empirical Analysis 
5.1 Correlation analysis
5.2 Regression results
5.3 Analysis
6 Conclusion 
Reference list 
Appendix
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Population Ageing and Average Retirement Age A cross-sectional analysis of OECD countries