Early retirement provision for elderly displaced workers

Abstract

This paper examines the effects of providing early retirement (ER) benefits to displaced workers with limited labor market opportunities at old age. An age-cutoff in eligibility for ER benefits in Norway, which we exploit using a regression discontinuity design, facilitates our study. We utilize detailed Norwegian matched employer–employee data containing information on bankruptcies occurring between 2001–2010 to identify job displacements, along with data on individual income, wealth, pensions, and social security benefits to examine behavioral effects of ER provision and the associated implications for welfare and policy. While we are unable to detect any distortionary effect on labor supply, we detect that those who lose ER eligibility substitute 69 percent of their lost benefits through uptake of other social security benefits, with 51 percentage points attributed to disability insurance and 13 percentage points to unemployment insurance. Applying the Baily–Chetty formula for optimal social security, we show that ER provision is a suboptimal policy.