Norwegian Couples and the Take-Up of Pension Benefits
Author: Kristin Rasdal, ESOP Student Scholarship Recipient 2013.
In 2011 a comprehensive reform of the Norwegian public pension system was implemented. A key feature of the new pension scheme is the decoupling of the decision to retire from the labour force and the decision to claim old age pension benefits. Agents eligible for early pension take-up can claim pension benefits in the age range 62 - 75, regardless of whether they retire from the labour force or not. When a potential claimant delays pension take-up by, say, a year, she forgoes pension benefits this year - but annual pension benefits for the rest of her life are increased. The decision to delay claiming can therefore be thought of as buying an annuity.
Actuarial neutrality of a pension scheme requires that the expected value of future benefits is the same regardless of the timing of the pension take-up. In Norway, pensions are actuarially adjusted based on average longevity measures specific to each birth cohort. Since individual expected longevities may differ from the average longevity of a birth cohort, there is a potential scope for adverse selection. Individuals with lower than average expected longevity may increase their expected lifetime income by claiming as early as possible, while individuals with higher than average expected longevity may increase their expected lifetime income by delaying the pension take-up.
When the pension scheme was implemented in 2011, all four combinations of retirement and claiming turned out to be rather common. Brinch et al. (2013) find some positive correlation between retirement and the claiming of pension benefits, but the relationship is far from perfect. In particular, the authors find that claiming is strongly associated with predictors of expected longevity.
Individuals who retire without claiming pension benefits must rely on previous savings or some income stream to finance current consumption. Being in a couple may facilitate this option if agents can rely on the partners' income while delaying the pension take-up. This thesis investigates whether empirical evidence suggests that couples coordinate on claiming pension benefits.
The first empirical strategy is to investigate the decision to retire without claiming pension benefits, while the second empirical strategy is to investigate couples where both members were born in 1949 and eligible for early pension take-up in 2011. None of the empirical findings suggest that Norwegian couples coordinate on claiming pension benefits. Empirical evidence suggests, however, that the individuals understand and respond to the incentives in the pension scheme. Lack of coordination should therefore not be interpreted as lack of understanding of the incentive structure.
Read the full thesis in DUO.