EBRI Issue Brief
Social Security, Retirement Incentives, and Retirement Behavior: An International Perspective
- Escalating rates of early
retirement are imposing fiscal pressure on retirement systems
around the world. In some developed countries, the labor-force
participation rates of men ages 60-64 have fallen by 75 percent
over the last three decades. One explanation for this striking
decline is social security program provisions which create
disincentives to continued labor-force participation by older
- There are substantial differences
among developed nations in the labor-force participation of older
workers. While two-thirds of 60-year-old American males are
working, only one-quarter of men that age are working in Belgium.
Over the entire 55-65 age range, 63 percent of American males are
working, compared with only 40 percent of French males and 33
percent of Belgian males.
- There is strong evidence that the
early retirement provisions of social security systems in
developed countries determine the modal age of retirement. There
is a strong relationship between early retirement ages and
labor-force withdrawal rates; for example, in France, 60 percent
of those working at the early entitlement age of 60 leave the
labor force at that age.
- The core of this analysis is the
construction of “implicit tax/subsidy rates” on
additional work at older ages through each nation's social
security system. These rates measure the change in a worker's
retirement wealth entitlement from delaying retirement for one
year, relative to the amount that would have been earned over
- The U.S. Social Security system
has an actuarial adjustment for delayed benefits claiming and
other features that avoid financial incentives to leave the labor
force at age 62 for a married worker; there is a slight
disincentive to work for single workers and high wage earners.
However, at ages 65 and older there is a stronger incentive to
leave the labor force, with implicit tax rates on work of 19
percent for married workers and 33 percent for single workers.
- By comparison, other nations do
not have actuarially fair adjustments, and as a result impose
substantial taxes on additional work at older ages. In several
countries, implicit tax rates on work at older ages approach or
exceed 100 percent. This is because by delaying retirement,
workers forgo benefits which often replace close to their full
wage, in addition to having to pay the high payroll taxes
required to finance generous social security benefits.
- There is a striking correlation
across nations between high implicit tax rates on additional work
and low labor-force participation rates among older workers. This
suggests that social security program incentives are an important
determinant of retirement.