Social Security and Retirement around the World

Over the past 25 years, labor force participation at older ages has increased dramatically. In the 12 countries that are part of the NBER’s International Social Security (ISS) project, participation among those aged 60 to 64 has risen by an average of over 20 percentage points for men and over 25 percentage points for women.

In The Effects of Reforms on Retirement Behavior: Introduction and Summary (NBER Working Paper 31979), authors Axel Börsch-Supan and Courtney Coile report on the most recent work of the ISS project. The current analysis builds on previous project phases which showed that changes in health and education could not account for the extent of increases in participation. Instead, recent reforms to social security, disability, and other public benefit programs have strengthened the financial incentives to work at older ages. This phase makes use of differences across countries in the timing and extent of reforms to explore whether increases in employment are linked to these reform-driven changes in incentives.

The authors note that the past four decades have been a period of intense pension reform activity in the ISS countries. While these reforms have not always all pushed in the same direction, the general thrust has been raising eligibility ages, lowering benefit generosity, strengthening actuarial adjustments for delaying the initial claim of benefits, and reducing access to non-social-security programs that offer alternative pathways out of the labor force. 

Pension reforms have contributed to rising labor force participation at older ages in many developed countries.

To measure the financial incentive to work at older ages, the researchers compute the implicit tax rate on work, which is the loss in lifetime pension benefits that a worker experiences by working one year longer and delaying benefit claim, relative to the worker’s earnings. Each country team computes this measure for a large sample of workers over many years. Harmonization across countries is achieved by using an analytical template that rigorously applies the same methodology to country-specific databases.

Across the 12 ISS countries, the implicit tax averaged about 22 percent during the period 1994 through 2004 and about 12 percent during the period 2006 through 2013. Several countries, including Italy, Germany, and the Netherlands, experienced much larger decreases.

The researchers show, both in country-specific analyses as well as an analysis pooling data across countries, that a higher implicit tax rate is associated with an increased probability of exiting the labor force. They use their estimates to predict that pension reforms have reduced the annual probability of labor force exit by 1 to 3 percentage points. This analysis leads them to “conclude that the policy reforms that have reduced the financial incentives to retire early were the main drivers of the increase in old-age employment.”

— Courtney Coile

The research reported herein was performed pursuant to grant RDR18000003 from the US Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA, any agency of the Federal Government, or NBER. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof. This paper is part of the National Bureau of Economic Research’s International Social Security (ISS) project. This phase of the ISS Project is supported by the Alfred P. Sloan Foundation (G-2019-12578), the National Institute on Aging (grants P01 AG012810 and P30-AG012810) and by the U.S. Social Security Administration through grant #5-RRC08098400-10 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the authors and do not represent the views of the Alfred P. Sloan Foundation, SSA, any agency of the Federal Government, or NBER.