Implications of Full and Partial Retirement for Replacement Rates in a Defined Benefit System

Abstract

In this paper we use the actual rules and formulas of an occupational pension fund, the state pension fund and the tax system in the Netherlands to calculate net replacement rates at each age from 60 to 70 in full and partial retirement scenarios. We then vary the parameters of the pension formulas to study the sensitivity of the replacement rates. We also analyze the implications of late full retirement and partial retirement for the occupational and state pension entitlements. We pay particular attention to the retirement scenarios that are relevant for the current policy measures, aimed at making people work longer. We find that in the full retirement scenarios the replacement rates depend substantially on the underlying parameters of the pension system and on worker characteristics. In the partial retirement scenarios these changes are much less substantial. We also find that partial retirement results in a much smoother income path and encourages employees to defer their pension claims beyond age 65.

Keywords: Older workers, pensions, gradual retirement

JEL Classification: D31, G23, H55, J14, J22, J26