Retirement decisions and option values: Their application regarding Finland, Belgium and Germany

This paper studies determinants of retirement transitions of Europeans and focuses on the impact of social security systems on retirement behaviour. The analysis uses the first 8 waves (1994-2001) of the European Community Household Panel (ECHP). Based on those survey data, option values are constructed for each sampled individual of three countries: Finland, Belgium and Germany. The overall results of the duration and probit models show that the option value, health and well-being at work have a significant impact on retirement decisions. Poor health has an important effect on retirement risk, especially in Germany. In Germany and Belgium we see spikes in retirement at age 60 or 65, whereas the retirement path in Finland is smooth as of age 56. We suggest that a rise in the official retirement age is effective in Germany and Belgium, whereas in Finland the sustainable pension system requires a further cut in the level of pensions if retirement takes place before the official retirement age. The current economic incentives in Germany around the age of 65 or the new ones introduced in Finland with an accrual rate of 4.5% between the ages of 63 and 68 are not effective if workers retire before those ages.