We use reforms in the Swiss public retirement system to identify the responsiveness of retirement timing to financial incentives. A permanent reduction of retirement benefits by 3.4 percent induces more than 70 percent of females to postpone their retirement. The responsiveness of male workers, who undergo a different treatment, is lower.retirement insurance, incentives, social security, labor force exit, natural experiment, Switzerland

Barbara Hanel

Regina Riphahn

English

Research Papers in Economics

 
 
 
 
 
 
BGPE Discussion Paper 
 
No. 9 
 
 
Financial Incentives and the Timing of 
Retirement: Evidence from Switzerland 
 
 
Barbara Hanel 
Regina T. Riphahn 
 
December 2006 
 
 
 
ISSN 1863-5733 
 
Editor: Prof. Regina T. Riphahn, Ph.D.   
Friedrich-Alexander-University Erlangen-Nuremberg 
© Barbara Hanel, Regina T. Riphahn
 
  1
 
 
 
Financial Incentives and the Timing of Retirement:  
Evidence from Switzerland 
 
 
 
Barbara Hanel 
 
and 
 
Regina T. Riphahn 
 
 
 
December 5, 2006 
 
 
 
 
We use reforms in the Swiss public retirement system to identify the responsiveness of 
retirement timing to financial incentives. A permanent reduction of retirement benefits by 3.4 
percent induces more than 70 percent of females to postpone their retirement. The 
responsiveness of male workers, who undergo a different treatment, is lower.  
 
 
Keywords:        retirement insurance, incentives, social security, labor force exit,  
   natural  experiment,  Switzerland 
JEL Keywords:   J26, H55, J14 
 
 
Correspondence to:  
Regina T. Riphahn 
Department of Economics 
University of Erlangen-Nuremberg 
Lange Gasse 20 
90403 Nuremberg 
Germany 
 
Phone: +49-911-5302 826 
Fax:   +49-911-5302 178 
Email: regina.riphahn@wiso.uni-erlangen.de  2
1. Introduction and Background 
  Under pressure to prepare for imminent population aging, the retirement insurances of 
many industrialized countries consider reforms that set incentives to postpone retirement. A 
large literature attempts to quantify the effect of such retirement incentives, and the problems 
connected to identifying causal effects and to representing retirement incentives are widely 
discussed (Lumsdaine and Mitchell 1999, Coile and Gruber 2000, or Chan and Huff Stevens 
2004). We provide evidence from a recent natural experiment in Switzerland in the spirit of 
Krueger and Pischke (1992). 
  The Swiss retirement system (for a description see Bütler 2002) consists of a public 
social security pillar (AHV), financed mainly by payroll taxes, and of heterogeneous private 
pension systems as a second pillar. The public AHV pillar sets a minimum age as an 
eligibility criterion for benefit receipt. For men this age has always been fixed at 65, while 
females were able to retire at age 62. In 1991 a reform law ("10th revision") passed, which 
prompted two types of changes that we use as a natural experiment in our analysis. 
  First, the minimum age for women's full retirement benefit eligibility was ratcheted 
up in two steps from 62 years up to 64 years, while the minimum age for men remained at 65 
years. Second, it became possible for women and men to retire prior to that minimum age. 
The option to draw retirement benefits one year (and in a second step two years) prior to the 
minimum retirement age was introduced at the price of a permanent benefit discount. Since 
women already suffered the disadvantage of postponed regular retirement, their benefit 
reduction was half that of men. Table 1 reports the timing of the reform's implementation as 
well as the benefit reductions tied to early retirement.
 1 
  Based on these reforms we expect two responses: (a) the retirement propensity of 62 
and 63 year old women should decline when regular retirement age increases and benefit 
reductions are implemented for early retirement. (b) Men should start taking up retirement 
                                                 
1  Workers can also postpone receiving their benefits for up to five years. Since 1991 this yields a maximum 
increase in benefits of 31.5 percent (BSV 2006).  3
benefits prior to age 65 when the option of early retirement is introduced. Clearly, making a 
given practice costly (for women) and expanding retirement opportunities (for men) are 
distinct events that may call forth distinct responses. We investigate the behavioral 
responsiveness to these incentives. 
 
2. Data and Approach 
  Our data are taken from the Swiss Labor Force Survey (1991-2005), which is a 
rotating panel with up to five interviews per person and covers a representative sample of the 
Swiss population. In our estimations we consider all individuals aged 60 through 70 who 
were either employed or unemployed members of the labor force. This provides us with 
8,083 and 5,910 person-year observations for 4,067 different males and 3,222 different 
females. Of the observed males and females 34.6 and 40.5 percent make a transition to 
retirement, constituting 17.4 and 22.1 percent of the person-year observations. We censor 
observations after retirement.  
  The dependent variable describes whether a member of the labor force in year t 
indicates to be retired in year t+1. Unfortunately the data does not inform on the self declared 
retirees' income sources. Some of our retirees may not be receiving benefits from the first 
pillar of the retirement insurance when they indicate retirement. For our purposes this causes 
measurement error in the dependent variable increasing the standard errors of our estimates. 
Figure 1 depicts the retirement probabilities by age over time: women's propensity to retire at 
age 62 clearly declined when the first reform materialized in 2001 and again in 2005 when 
benefits were reduced further. Instead, the probability of retirement at age 63 went up after 
2001 and came down again when regular retirement age increased to age 64. The spike in the 
retirement propensity at age 64 in 2002 and 2003 is spurious and related to an extremely 
small number of observations. Male retirement entry shows no clear response to the modified 
regulations which allowed retirement at age 64 starting in 1997 and at 63 starting in 2001.  4
  Our estimation applies a difference-in-differences approach, where we control for 
individual age and the year of observation. We add indicators for the groups which are 
affected by the institutionally modified retirement incentives: the propensity to retire should 
decline for 62 year old females after 2000 and again after 2004, and similarly for 63 year old 
women after 2004. For men we expect increasing inflows into retirement for the 64 (63) year 
olds after 1996 (2000).  
  We use a discrete time hazard model to test whether the institutional changes in 
retirement regulations yielded statistically significant behavioral responses. We apply random 
effects logit estimators to control for person-specific correlations in standard errors. Besides 
age, year, and incentive effects we consider individual characteristics such as education, 
marital status, and the industry of a last or current employment in our specifications. 
 
3. Results and Discussion 
  The estimation results are presented in Table 2 separately for females and males. 
Columns 1 through 3 subsequently add control variables to the model specification. The 
coefficients of the incentive effects for women and men are presented in Panels A and C, 
respectively. These coefficient estimates are highly statistically significant for the female 
sample. For women the predicted retirement propensities (see Panel B) changed substantially 
and significantly when financial incentives were modified: the probability to retire at age 62 
fell by 70 percent between 2000 and 2001, when the regular retirement age was shifted and 
retirement at age 62 became available at the price of 3.4 percent of total benefits. While the 
benefit reductions for the 2005 reforms also amounted to 3.4 percent, the response rates 
where somewhat smaller: the propensity to retire at age 62 fell by an additional 45 percent 
between 2004 and 2005, and the propensity to retire at age 63 fell by about 34 percent when 
the benefit reductions were introduced in 2005. All of these changes are statistically  5
significant and suggest that the older female labor force was quite responsive to shifts in 
retirement incentives. 
  The estimated responses of male workers are much more modest. The incentive 
variables here do not yield statistically significant coefficient estimates (see Panel C), even 
though the predicted effects indicate substantial and significant behavioral adjustments in the 
expected directions (see Panel D): when early retirement options became first available in 
1997, the propensity to seek retirement at age 64 increased by over 50 percent based on the 
results in columns 2 and 3. The retirement propensity at age 63 increased by about 33 percent 
in 2001, conditional on personal characteristics.
2 
  In separate estimations (not presented to save space) we tested whether the response 
to the regulatory reforms changed over time. The results indicate that indeed both men and 
women increasingly responded to the reforms and adjusted their behaviors more strongly as 
time went by under new regulations. Given that the information on changes in retirement 
incentives had been available since 1991 and had been publicized through a referendum on 
the issue in 1995 (Bütler 2002), this supports the existence of a social "retirement norm" or 
"focal point", which takes time to adjust.  
  Overall these findings confirm prior studies (e.g. Asch et al. 2005) and suggest that 
reforms in financial retirement incentives may still be able to substantially affect the 
retirement plans of the generations to come. 
                                                 
2 All results are robust to applying a linear probability model instead of a logit estimator.  6
Bibliography 
Asch, B., S.J. Haider, and J. Zissimopoulos, 2005, Financial Incentives and Retirement: 
Evidence from Federal Civil Service Workers, Journal of Public Economics 89(2-3), 427-
440. 
 
BSV (Bundesamt für Sozialversicherungen), 2006, Statistiken zur sozialen Sicherheit: AHV 
Statistik 2006, Bern / Switzerland.  
 
Bütler, M. 2002, The Political Feasibility of Increasing the Retirement Age: Lessons from a 
Ballot on the Female Retirement Age, International Tax and Public Finance 9, 345-365. 
 
Chan, S. and A. Huff Stevens, 2004, Do changes in pension incentives affect retirement? A 
Longitudinal Study of Subjective Retirement Expectations, Journal of Public Economics 88 
(7-8), 1307-1333. 
 
Coile, C. and J. Gruber, 2000, Social Security and Retirement, NBER Working Paper No. 
7830, Cambridge. 
 
Krueger, A. and J.S. Pischke, 1992, The Effect of Social Security on Labor Supply: A Cohort 
Analysis of the Notch Generation, Journal of Labor Economics 10(4), 412-437. 
 
Lumsdaine, R. and O. Mitchell, 1999, New Developments in the Economic Analysis of 
Retirement, in: Ashenfelter, O. and D. Card, eds., Handbook of Labor Economics Vol. 3C, 
(North Holland, Amsterdam) 3261-3307. 
 
 
 
 
Table 1: Regular Retirement Age and Early Retirement Options after the 1991 Reform 
 
Men   Women   
  Regular Retirement 
Age 
Early Retirement Age 
(% Benefit Reduction) 
Regular Retirement 
Age 
Early Retirement Age 
(% Benefit Reduction) 
1996  65  - -  62  - - 
1997 - 2000  65  64 (6.8 %)  -  62  -  - 
2001 - 2004  65  64 (6.8 %)  63 (13.6 %)  63  62 (3.4 %)  - 
starting 2005  65  64 (6.8 %)  63 (13.6 %)  64  63 (3.4 %)  62 (6.8 %) 
  
 
 
 
 
 
 
  7
Table 2: Random Effects Logit Estimation: Results for the Probability to Retire 
 
Coeff. Coeff. Coeff.
(t-value) (t-value) (t-value)
(1) (2)  (3)
A - Women: Estimation results
Incentive: age 62 after 2000 -1.891 ** -1.913 ** -1.916 **
(-8.08) (-8.16) (-8.15)
Incentive: age 62 after 2004 -2.513 ** -2.556 ** -2.563 **
(-7.10) (-7.19) (-7.19)
Incentive: age 63 after 2004 -0.542 -0.603 * -0.661 *
(-1.79) (-1.98) (-2.16)
Age (10) yes ** yes ** yes **
Year (13) yes ** yes ** yes **
Education (5) — yes ** yes **
Marital status (4) — yes yes
Industry (11) — — yes **
B - Women: Predicted retirement probability 
Age 62 2000 25.56 26.65 26.55
Age 62 2001 7.43 7.89 7.95
Age 62 2004 9.10 9.92 10.00
Age 62 2005 4.90 5.36 5.51
Age 63 2004 36.63 38.87 39.01
Age 63 2005 24.38 25.58 25.15
C - Men: Estimation results
Incentive: age 64 after 1996 -0.002 -0.032 -0.061
(-0.007) (-0.12) (-0.22)
Incentive: age 63 after 2000 0.279 0.258 0.264
(1.17) (1.08) (1.09)
Age (10) yes ** yes ** yes **
Year (13) yes yes yes
Education (5) — yes ** yes **
Marital status (4) — yes yes
Industry (11) — — yes **
D - Men: Predicted retirement proability 
Age 64 1996 8.53 7.14 7.18
Age 64 1997 10.38 10.96 11.37
Age 63 2000 6.64 7.10 7.17
Age 63 2001 9.03 9.38 9.55
**
oo
** * * *
** ** **
** ** **
 
 
 
Note: **, * and 
o indicate statistical significance at the 1, 5, and 10 percent level. The estimations for 
females use 5,910 those for males 8,083 person-year observations. The numbers in parentheses in the 
very first column indicate the number of coefficients estimated in each group of covariates. In all 
cases a LM test rejected the hypothesis that individual specific random effects had a variance of zero. 
In panels B and D the asterisks indicate the statistical significance of the difference between the 
predicted probabilities. Here the standard errors were bootstrapped with 300 draws from the original 
sample.  
  8
Figure 1: Probability of a Transition to Retirement by Age over Time 
 
(a)   Females 
 
|
|
|
| |
|
|
|
|
|
|
|
0%
10%
20%
30%
40%
50%
60%
70%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year of Retirement
Age 62 Age 63 Age 64 |
 
 
(b)   Males  
 
|
0%
10%
20%
30%
40%
50%
60%
70%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year of Retirement
Age 63 Age 64 Age 65 |
 
 
Source: Own calculations based on Swiss Labor Force Survey (1991-2005). 
Note:    Vertical dashes indicate calculations based upon less than 30 observations. 
 
 
 
 
 

Do changes in pension incentives affect retirement? A Longitudinal Study of Subjective Retirement Expectations,

Financial Incentives and Retirement: Evidence from Federal Civil Service Workers,

New Developments in the Economic Analysis of Retirement,

Social Security and Retirement,

The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation,

The Political Feasibility of Increasing the Retirement Age: Lessons from a Ballot on the Female Retirement Age,

Financial Incentives and the Timing of Retirement: Evidence from Switzerland

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Financial Incentives and the Timing of Retirement: Evidence from Switzerland

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