In an in-depth working paper (Pension Reforms and Couples’ Labour Supply Decisions by Hamed Markazi Moghadam, Patrick A. Puhani, & Joanna Tyrowicz) using German SOEP data, researchers have explored the behavioral response of couples when one partner reaches a typical retirement age. The emphasis of the study was on understanding the “cross effects,” which reveal how husbands might adjust their labor participation when their wives approach retirement and vice versa.
Germany employs a defined benefit pay-as-you-go pension system characterized by an earnings point system. This structure ensures that pension benefits are proportional to relative lifetime earnings. Benefits are determined based on the points accumulated throughout one’s working life, which depend on one’s annual earnings close to the national average. Notably, the replacement rate generally does not vary based on life expectancy at retirement. For most cohorts studied, the standard retirement age is 65 for both genders.
Background on Early Retirement Pathways In Germany
- Retirement due to Unemployment: One could retire as early as age 60 if unemployed.
- Long-term Insured Retirement: At age 63, if an individual has been insured for at least 35 years in the public pension system.
- Very Long-term Insured Retirement: Introduced in 2012, this pathway allows those insured for at least 45 years to retire early. In 2014, the path was made more generous, permitting those born before 1953 to retire at 63 if eligible. For those born between 1953 and 1964, the retirement age was gradually increased by two months each year, returning to 65.
- Retirement due to Severe Disability: Workers could retire at age 60 if they faced severe disabilities.
- Retirement due to Reduced Capacity to Work: A prominent program without age restriction, this pathway didn’t undergo changes in age restriction for the studied cohorts.
- Special Pathway for Women: Women with at least 10 years of mandatory contributions post-age 40 and 15 years of active social security insurance could retire at age 60. This pathway covered about half of all women.
Lack of Actuarial Discount:
- A prominent feature of Germany’s early retirement pathways is the absence of actuarial discounts. Early eligibility provided almost the same replacement rate as standard retirement, making early retirement especially appealing.
Reforms Over the Years:
- A series of reforms were implemented on these pathways. The general trend involved increasing the age threshold for claiming benefits through specific pathways. Although some options allowed retirement at 60 or 63 with a pension benefit reduction of 3.6% per year (0.3% per month), pathways like “retirement due to unemployment” and “retirement for women” witnessed a gradual increase in the retirement age from 60 to 65.
- Notably, the 1999 reform abolished the special early retirement option for women born in 1952 and later.
Implications of the Reforms:
These pathways, particularly the ability to retire early without significant penalties, have considerable influence on labor participation decisions of individuals and couples. As reforms alter the attractiveness of these pathways, behavioral responses in the labor market are expected. This context sets the stage for understanding how couples in Germany adjust their work participation in light of policy changes related to retirement.
Before Retirement Reforms (Pre-Reform Period):
- When either spouse reached 60, both demonstrated a noticeable reduction in labor participation.
- Specifically, when a husband turned 60, wives reduced their labor participation by 4.5 percentage points (significant at the 10% level). Meanwhile, husbands showed a 6.3 percentage point drop (significant at the 5% level) when their wives reached the same age.
- This almost symmetrical behavior of husbands and wives echoes findings from an Australian study by Atalay et al. (2019).
- Notably, since husbands were average older than their wives in this sample, wives also lessened their labor participation by 6.5 percentage points (at the 5% significance level) when their husbands turned 63.
After Retirement Reforms:
- The cross effects shrink significantly post-reform. For the “Male Reform” and “Male-Female Reform” groups, the coefficients indicating the wives’ response to their husbands turning 60 near zero and lose statistical significance. Husbands, on the other hand, also exhibit reduced response.
- Graphical representations in Figures 3a and 3b visually illustrate these changes. These figures suggest that while the early retirement ages have a diminished impact on labor participation decisions post-reform, the standard retirement age of 65 has grown in influence.
What They Are Saying
While previous literature has hinted at asymmetric reactions between husbands and wives during retirement, this study suggests that the observed symmetry or asymmetry in behavior can be influenced by policy changes and constraints on early retirement options.
The data underscores that preferences and external conditions (like reforms) are crucial in dictating labor market decisions. The reforms in Germany, which made early retirement less financially appealing, have impacted the way couples make retirement decisions, with both members now more likely to consider their own retirement incentives than their partner.