Flexible retirement

Flexible retirement – that is the opportunity to choose one’s own personal retirement age – serves as a hedge against pension risk and provides insurance to workers facing health or productivity shocks. Flexible retirement and flexible pension schemes are in practiceclosely linked because of imperfect capital markets and institutional restrictions. This paper discusses three conditions to provide insurance through flexible retirement. First, it should be possible to adjust the pension starting date at limited cost. This condition isgradually being fulfilled, as many countries are moving towards more actuarially neutral pension schemes. Second, individuals should be willing to adjust their labor supply in case of a wealth shock. This condition seems largely fulfilled, although the available empirical evidence suggests that the framing of pension wealth is at least as important as the income effect. Third, the labor market should be able to deal with flexible individual retirement decisions. This condition is gaining importance, but has not yet received muchattention in the literature. Institutions often hamper employment past the ‘standard retirement age’. Moreover, the hiring rates of older workers are low and their unemployment duration is high. Institutional reforms facilitating flexible retirementopportunities are desirable from an insurance perspective.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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