The Role of Social Security Reforms in Explaining Changing Retirement Behavior in Denmark, 1980– 2016

Like other OECD countries, Denmark has witnessed a remarkable turnaround in the labor force participation of older people over the last half-century. Starting from the mid-1990s, however, a series of pension reforms were enacted, tightening eligibility requirements, closing off certain early retirement pathways, and shortening the duration of the Post-Employment Wage. These reforms increased the incentives for later labor force exit. We examine whether changing incentives in the pension system caused the rising labor force participation of older adults in Denmark since the turn of the century. We do so by applying a benefits calculator we developed in previous work to microdata on a representative sample. We compute an after-tax retirement income stream for each possible pathway out of the labor market for each retirement age and construct incentive measures inherent in the pension system, such as social security wealth and its annual accrual relative to earnings. We then regress labor force exit on these incentive measures, separately by gender and marital status, and generate predicted and counterfactual retirement probabilities that we compare to the observed probabilities to infer the causal effect of incentives for explaining changing retirement ages.