Navigating through the Finnish Pension System

The paper constructs a competing risks duration model, explaining the probability of retirement due to old-age, ill health or long-term unemployment. It also attempts to measure the degree of substitution between the various retirement channels, among other things, by using data on pension application rejections. The effect of the economic incentives was tested in a number of alternative specifications. In addition to simple replacement ratio, life-cycle incentives were calculated for each exit channel separately. Both the grace period compensations (unemployment benefits and sick allowances) and the actual pension benefits were considered. The paper concludes that the baseline hazards as well as the effects of a number of explanatory variables differ signficantly between the distinct retirement channels. It also finds some evidence on the channel substitutability between different retirement channels.