The willingness to pay, accept, and retire

  • Philipp Schreiber Philipp Schreiber
  • Christoph Merkle Christoph Merkle
  • Martin Weber Martin Weber

Today’s pay-as-you-go social security systems are put under pressure by increasing life expectancy, the baby boomer generation entering retirement, and an early effective retirement age. In developed countries, many employees retire before reaching the full retirement age. Conducting a large online experiment, we relate the retirement timing decision to the disparity between the willingness-to-accept (WTA) and the willingness-to-pay (WTP). Our results reveal that the framing of the decision problem strongly influences the reservation price for early retirement. The willingness-to-accept for early retirement is more than twice as high as the corresponding willingness-to-pay. Using actual values from the German social security system as market prices, we show that the presentation in a WTA frame can induce early retirement. In this frame, the implicit probability of retiring early increases by 30 percentage points. We also show that the disparity between WTA and WTP is correlated with loss aversion. Repeating the analysis in a representative household survey (German SAVE panel) we find similar results.

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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