In an effort to improve the long-term sustainability of the public pension system, the Dutch government announced via 2011 and 2012 reforms that it would gradually increase the Statutory Retirement Age (SRA) from age 65 towards age 67. The SRA is both the age at which individuals begin receiving a public pension and a “mandatory retirement” age, in that employees who wish to work past the SRA must be offered a new contract by their employer.
Ferrari et al. (2023) investigates the within-firm spillover effects of the delayed retirement of an employee, exploiting variation in the SRA of older workers’ from 65 years and 3 months to 66 years and 4 months. In particular, the paper studies the impact of delayed retirement of older workers on younger workers. The paper employs a two-step analysis to study Dutch firms’ responses to an increased SRA between 2013 and 2019. First, it uses an event study model to estimate the effects of a single worker approaching and reaching the SRA, referred to as a focal worker, on the outcomes of their firms and coworkers. Next, it uses a difference-in-differences model to examine the consequences of raising the SRA on the same outcomes.
The paper finds evidence that firms start hiring replacement workers a few months before a focal worker reaches the SRA. Additionally, after the retirement of a focal worker, younger coworkers experience increased promotions as well as hours worked and wages. The paper estimates that one six-month retirement delay within a firm reduces incumbent coworkers’ earnings by around €4,700 over a 21-month period around the event. Additional spillovers exist due to a delay and net decrease in hiring into the firm.
The paper uses these estimates to calculate the MVPF of a policy that increases the SRA by one month, taking into account the spillover effects on younger workers.
MVPF = 0.5
The net cost of increasing the SRA is the sum of the payments saved plus any fiscal externalities from both focal workers and their coworkers. All numbers are scaled to be per person directly affected by the delayed SRA (which includes both focal workers and other older individuals who have already retired from the labor force).
By increasing the SRA, the government saves €717 per month on retirement benefits, but increases monthly spending on other welfare policies for the same individuals by €306 (€275 in payments and the rest in related administrative costs; estimates from De Koning et al. (2017). The government collects an additional €91 per month in income taxes due to the delayed workforce exits of focal workers. However, the government forgoes additional income taxes due to negative spillover effects on the earnings of other workers via delayed coworker promotions (€43) and a reduction in hiring (€27).
The net cost (total savings) is then €717 – €306 + €91 – €43 – €27 = €432 per month.
The willingness to pay accounts for both older people’s and younger workers’ willingness to pay to avoid an increase in the SRA. All numbers are scaled to be per person directly affected by the delayed SRA. In the baseline specification, the paper assumes that older people value a dollar from working the same as one from a public pension.
The willingness to pay by older people to avoid an increase in the SRA is the sum of what would be their forgone public pension (€717) less the additional income from other benefits (€275) and their increased earnings from working longer (€322), for a total of €120 per month.
There are two additional pieces that contribute to the willingness to pay as a result of spillover effects. First, the willingness to pay by incumbent coworkers is the reduced (after-tax) earnings of €45 per month. Second, the willingness to pay by other workers is the reduced (after-tax) earnings due to the decrease in hiring of €36 per month.
The total willingness to pay per affected older person is then €120 + €45 + €36 = €201 per month
The estimated MVPF of increasing the Statutory Retirement Age by one month is then (€201/€432) = 0.465. The paper highlights the importance of incorporating the spillover effects by noting the MVPF is 0.239 if the spillover effects are excluded from the calculation.
Jaap De Koning, Arie Gelderblom, Jose Gravesteijn, and Elisa De Vleeschouwer
(2017). “Kosten en opbrengsten terugbrengen AOW-leeftijd naar 65 jaar.” mimeo. https://www.50pluswetenschappelijkinstituut.nl/wp-content/uploads/2019/01/aow-seor-samenvatting-def-2402.pdf
Irene Ferrari, Jan Kabátek, Todd Morris (2023). “Longer Careers: A Barrier to Hiring and Coworker Advancement?” IZA DP No. 16098. https://www.iza.org/publications/dp/16098/longer-careers-a-barrier-to-hiring-and-coworker-advancement