Partial Retirement Opportunities and the Labor Supply of Older Individuals

We evaluate partial retirement options as a tool to increase labor participation among older individuals. In a stated choice experiment, Dutch survey respondents were asked to choose among early, late and partial retirement scenarios purged from restrictions on part-time and gradual retirement. Retirement scenario characteristics were randomized, generating rich variation in the choice options. The stated choices are validated using revealed preference data on (planned) retirement decisions. Using the stated choice data, we estimate a model that makes the trade-offs between leisure and income over the life cycle explicit, and use the estimated model for counterfactual policy simulations. We find that, as expected, a higher statutory retirement age makes actuarially fair (abrupt) early retirement more attractive and makes late retirement less attractive, while for any statutory retirement age, about one in three respondents prefer partial retirement. The partial retirement decision is sensitive to pension accruals and the wage rate during partial retirement. At the extensive margin, retirement decisions are more sensitive to accrual and wealth effects of pensions than found in earlier studies. Early retirement becomes more attractive than late retirement when individuals do not have the partial retirement option, demonstrating the potential of partial retirement as a policy instrument to stimulate labor participation, especially when the statutory retirement age is increased.