Retirement Decisions and Retirement Incentives: New Evidence from Canada

The purpose of this study is to use microdata to estimate the behavioral effects of the retirement incentives embodied in Canada’s social security system. We build on and extend the previous work. Nearly twenty years more data is now available compared to earlier research on this topic and those twenty years have seen a remarkable change in retirement behavior. This allows us an opportunity to examine if the social security system in Canada has contributed to the trends in overall retirement behavior. We have three main findings. First, there has been a very large shift toward later retirement over the past 20 years in Canada. Both men and women are retiring later, with proportions working after age 65 now double what they were in 1995. Second, we reconfirm previous findings showing that public pension incentives matter for retirement decisions. The pension penalty on extra work is consistently found to lead to more retirement through the implicit tax on extra work. On the other hand, the impact of the level of social security wealth is more mixed. For males higher pension wealth has the expected impact of encouraging retirement but for females the sign is reversed, although the estimated impact is small in either case. Finally, we find that changes in the public pension system are not a major contributor to the trends in retirements.

Draft (June2020)