The Effect of Pension Subsidies on the Retirement Timing of Older Women

Abstract

Abstract I estimate the effect of additional pension benefits on women’s retirement decisions by examining a German pension subsidy program. The subsidies have a kinked relationship with the recipients’ past pension contributions, creating a sharply different slope of benefits for similar women on either side of the kink point. I find that a 100 euro increase in the monthly benefit induces female recipients to claim their pensions six months earlier. Recipients also adjust their labor supply by using unemployment insurance as a stepping stone to retirement and by reducing the time spent in marginal employment. A back-of-the-envelope calculation suggests that the ratio of behavioral to mechanical costs for this subsidy program is 0.25, which is smaller than that of many other income support programs. (JEL: H55, J18, J21, J26)