Page 24 - IDEA Study 7 2015 Working Beyond Pensionable Age

they become entitled to early old age pension because they become entitled to unconditional income and face higher effective tax. But, majority of individuals retire when reaching statutory retirement age, which is approximately 3 year after becoming entitled to early old age pension. There are two possible explanations why the majority of healthy individuals do not retire at early retirement age, when the institutional disincentives to work are the highest, according to the net participation tax rate, and individuals have guaranteed unconditional income (old age pension). The first and more probable is that while this specification of the participation tax rate does not take into account the permanent reduction in old age pension income that results from early retirement, the individuals are themselves aware of this and behave accordingly. The second, much less probable explanation is that individuals are not aware of the reduction in old age pension income resulting from early retirement, but that they do not react to the increased institutional disincentive to work either (their elasticity would be very small in this scenario). Graphs 14, 15 and 16 (in the appendix) depict specifications of the net participation tax rate that include the effects of unemployment benefits and/or of the cancellation of taxpayer tax credit for pensioners. Graph 15 shows the net participation tax rate when pensioners are not eligible for taxpayer tax credit or unemployment benefit. This situation occurred in 2013. The least incentives to work were felt by individuals eligible for early retirement. Old age pensioners' incentives to work were lower than the incentives for prime age individuals. Old age pensioners faced incentive to leave labour market even higher than in other years (because they are not eligible for taxpayer tax credit) and were tempted to leave labor market (because of their unconditional old age pension). So, pensioners were even more discouraged from working in 2013 than in other years.6 Graphs 14 and 16 depict the only specification of net participation tax rate by which the net participation tax rate is higher for prime age individuals than for those eligible for an old age pension. In these situations, institutional incentives to work would partly offset pensioner temptation to leave labour market. This is caused by the fact that working prime age individuals are considered to sacrifice unemployment benefits under these specifications of the net participation tax rate. However, for the reasons outlined above, we believe that the additional costs and risks of falsely claiming unemployment benefit while economically inactive outweigh the gains and therefore that the net participation tax rates for prime age individuals are comparable to those for pensioners (graph 11), which indicates that pensioners are not more motivated to work by institutional incentives than prime age individuals who are not eligible for early retirement. The most complex specification of the participation tax rate is the full participation tax rate, which takes into account the effects incorporated in the net participation tax rate and, additionally, includes the impact of economic status on the magnitude of future old age pension income. For example, each additional year of work before reaching statutory retirement age increases an individual's future old age pension income by 1.5 % of the so-called assessment base, whereas the same period of work once the individual is beyond statutory retirement age and collecting a full old age pension increases his future old age pension 6 The reasoning, why individuals eligible for early retirement do not retire, although they face high participation tax rate and temptation to leave labour market, are explained in the previous paragraph. 22