Pension plans and retirement incentives

This paper aims to examine the impact of type of pension scheme on retirement behavior. Section 1 describes a simple, theoretical model of optimal retirement. Section 2 introduces an empirical model of a simple retirement savings plan, or defined contribution pension scheme. Section 3 compares this with a defined benefit scheme. Sections4 and 5 examine the effect of these pension plans on work incentives. The following three sections extend the basic model to introduce'real world'features of pension plans. Section 9 examines the policy implications of the results and sets out anagenda for future research in this area. The results show a powerful incentive to leave work at the earliest possible age in defined benefit plans. Defined contribution plans, in contrast, encourage people to remain in work longer.