Pension reform: Disentangling the impact on Retirement behavior and Private Savings
In January 2006 a pension reform was implemented in the Netherlands that substantially reduced the pension wealth of workers born in 1950 or later. At the same time a tax facilitated savings plan was introduced that substantially reduced saving costs to all workers. This paper uses linked administrative and survey data over the period 2007-2014 in which we observe pension rights, individual retirement expectations, decisions to participate in savings programs and actual retirement choices of public sector workers born in 1949 and 1950 to document the impact of this pension reform. The results show that when confronted with an unanticipated drop in public pension wealth, the average worker almost fully maintains current and post retirement consumption at the expense of leisure in retirement. This is consistent with low substitution rates between private and public wealth for older workers. We further find that high wage earners participate more often in the tax facilitated saving program. The high wage earners within the cohort which is affected by the pension reform is able to fully compensate the loss in public pension wealth with private wealth. An unintended side effect of the introduction of the tax facilitated savings plan is that in particular high wage earners who are not affected by the pension reform decide to retire even sooner that initially planned.
Keywords: natural experiment, regression discontinuity, retirement behavior, labor supply, substitution between private and public pension wealth.
JEL codes: J26, H55, J14