Career breaks, broken pensions? Long-run effects of early and late-career unemployment spells on pension entitlements

Abstract

Abstract Unemployment periods and other career breaks have long-term scarring effects on future labour market possibilities, permanently affecting workers' retirement income and standard of living as pensioners. Previous literature has focused on the impact of job loss on working careers with little attention to its impact on pension wealth, particularly the extent to which longevity heterogeneity amplifies unemployment scars. This paper investigates the effect of single and multiple unemployment spells on the lifetime pension entitlements of earnings-related contributory pension schemes, considering the timing and duration of breaks, alternative lifecycle labour earnings profiles, scarring and restoration effects on labour market re-entry, the existence of pension credits and pension accruals for periods spent outside the labour market, longevity heterogeneity, and the accumulation and decumulation redistributive features of the pension scheme. Pension entitlements are estimated using a backward-looking simulation approach based on the actual Portuguese public pension system rules and stylized labour market profiles identified in the SHARE Job Episodes Panel data using a sequence analysis. Longevity heterogeneity is modelled using a stochastic mortality model with a frailty model. Our results show that the timing and duration of unemployment periods is critical, that scarring effects amplify pension wealth losses, that minimum pension provisions, pension credits and pension scheme redistributive features can partially mitigate the impact of unemployment periods on future entitlements, and that the presence of positive correlation between lifetime income and longevity career breaks can amplify the asymmetry in the distribution of pension entitlements across income groups.