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

Abstract

Flexible retirement arrangements in which workers can retire abruptly or gradually at the age of their choice with higher retirement income as a reward for working more or longer fit well with the changes in life course patterns in the past decades and may help to keep pension systems sustainable in times of population ageing. We analyse the flexibility of an existing pension arrangement in the Netherlands, characterised by a subsistence-level pay-as-you-go state pension combined with a supplementary occupational pension. We use the actual rules of a large occupational pension fund, the state pension and the tax system to calculate net replacement rates at ages 60 to 70 in full and partial retirement scenarios. We find that partial retirement results in a smoother income path and encourages employees to defer their pension claims beyond age 65. Moreover, while occupational pensions give close to actuarially fair rewards for continued full-time or part-time work, the state pension does not. This makes postponing retirement less attractive for low-income groups in particular.