mental health and pension changes

In the current issue of The Economic Journal, Dutch researchers report the results of a natural experiment: a reduction in retirement benefits for civil servants, beginning with those born on or after the first day of January 1950. They find significantly higher rates of depression in the ‘treated’ cohort born in 1950 compared to the ‘untreated’ cohort born in 1949. Depression is a leading cause of disability and is associated with heart disease, diabetes and other diseases, so healthcare costs may offset some of the government’s expected fiscal savings.

Prior to 2006, public sector workers in the Netherlands could retire at age 62 years and three months with a replacement rate of 70% of their average yearly earnings since 2004. As of 2006, those born before 1 January 1950 could continue to retire under the old rules, but for those born on or after 1 January 1950, the replacement rate is lowered to 64%. These younger workers need to work an additional one year and one month to obtain the 70% replacement rate enjoyed by counterparts who may be just a few days, weeks or months older. Two years after the policy change, we compared the mental health of workers born in 1949 (turning 59 years old in 2008) and 1950 (turning 58 years old in 2008). We find strong effects from the exogenous change in the retirement system: depression rates among the 1950 cohort were about 40% higher than among the 1949 cohort. ….

Our finding of persistent negative health effects prior to actual retirement from changes in the retirement system suggests that post-retirement health worsens when individuals are induced to extend their working lives.

Andries De Grip, Maarten Lindeboom and Raymond Montizaan, “Shattered Dreams: The effects of changing the pension system late in the game“, The Economic Journal, 122 (March 2012), pp. 1–25.

The policy implication is not that pension rules should never change. This is impossible because of budget constraints. A more realistic lesson is that governments should phase in changes in pension rules gradually, and provide future pensioners with ample advance warning. The writers explain that changes in the Dutch pension system “came as a surprise when announced in July 2005” and were perceived to be unfair because they affected only those born on or after January 1st, 1950. Cohorts born in later years will presumably suffer less depression, as they have more time to adjust and are less apt to compare their benefits with those of older colleagues born prior to 1950.

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