A regression discontinuity evaluation of reducing early retirement eligibility in Poland

Abstract

Purpose The purpose of this paper is to isolate and evaluate the causal effect of the changes in eligibility criteria on labor force participation (LFP) and exit to retirement of the cohorts affected by the reform that canceled most of the early pensions in Poland in 2009. At the individual level the reform created a huge discontinuity in treatment of different generations. Design/methodology/approach The authors rely on Polish Labor Force Survey and employ regression discontinuity design to evaluate the change in participation subsequent to the eligibility reform among the treated cohorts. Findings The authors find a statistically significant, but economically small discontinuity at the timing of the reform. The placebo test shows no similar effects in earlier or later quarters. Yet, the pure treatment effects are insignificant in vast majority of the specifications. Research limitations/implications There are some limitations of the data used in the research. It does not cover total population and some panel attrition can be expected. Authors also needed to cope with the lack of required details in survey questions. The main limitation of the method lies in the measurement of the immediate (short-term) effects while in many cases people require more time that 1–2 quarters for the decision after policy change. Practical implications The reduction of outflows to retirement was much less pronounced than could have been expected, largely due to already relatively lower propensity to retire early. Social implications There are two main policy implications of the study. First, constraining the pension eligibility criteria for retirement are frequently opposed by social actors. It is often considered that early retirement is a privilege – awarded on a basis of occupation or even simply employment in an industry. In many countries – e.g. France, Italy, Germany – attempts to make the eligibility criteria more strict resulted in general strikes and Poland was no exception from this rule. If treatment effects of the large and radical eligibility reform are small in participation rates and pension take-up rates, then immediate fiscal effects are bound to be small as well, even if in the desirable direction. This may explain why – given the strong social resistance – in many countries eligibility reforms are delayed or narrowed in scope. Second, the economic rationale for strong social resistance to eligibility reforms builds on assuming either a relatively high valuation of leisure time after exiting the labor market or a relatively high subjective valuation of the unemployment risk after passing the early retirement age threshold. If leisure preference is overstated, reducing eligibility may be opposed as such, but eligibility alone is irrelevant for household decision making. Meanwhile, unemployment risk may be mitigated via alternative instruments, such as employment protection legislation, as is the case in Poland. Depending on a specific composition of the two factors in a given country, the effects of the eligibility reforms may be as high as in Switzerland or as low as in Poland. Originality/value First, the authors provide an analysis of discontinuities in transitions from activity to retirement, rather than focusing on the labor market status. The panel dimension of the data permits to observe directly the flows into retirement/inactivity, controlling for age and birth cohort. Second, the authors complement a pure discontinuity in cohort analysis with a fuzzy design, because in addition to age eligibility the authors also analyze the effects of changes in occupational eligibility. Third, the authors provide a benchmark for the estimates in the actual quarter of the reform by a series of placebo and conditional specifications. This allows to evaluate the (immediate) size and heterogeneity of the treatment effects. The authors find small effects of age eligibility reduction and effectively no effects of occupational eligibility. Hence, increased LFP of the elderly, observed even prior to the reform, seems to be driven by factors unrelated to early pension eligibility.