Government transfers to older persons in Canada are one of the largest and fastest growing components of the government budget. In this context, a notable trend in labour force behavior in Canada is the steady decline in work among many groups of older workers. We study the impact of Canada's Income Security system on the retirement decisions of older workers. A weakness of previous work is that only one component of the IS system is studied in isolation from the others. Our work aims to take a more comprehensive approach by modeling the entire IS system in a unified framework.
The key to our approach is the building of a comprehensive data set that has information for a very large sample of older Canadians on their earnings histories, work decisions, marital status and spousal characteristics, and the characteristics of their jobs. These data are employed to construct a simulation model that incorporates the incentives for retirement under the various programs of the Canadian public Income Security (IS) system. An empirical model of the retirement decision as a function of these incentive variables, as well as a rich set of control variables designed to capture other impacts on retirement, is then estimated.
There are two findings of importance. First, for the typical worker, the public IS system provides increasingly strong disincentives to work after age 60. Workers actually see the present discounted value of their IS entitlement fall from additional work after age 61, and by age 69 the reduction in IS entitlement amounts to 43 percent of what they would earn in that year. Second, there is a significant impact of these disincentives on work decisions. Using both one-year and more forward looking measures, we estimate that workers with larger returns to additional work are less likely to leave the labor force.Draft, November, 2001: PDF.