Partial retirement opportunities and the labor supply of older individuals

We evaluate partial retirement options as an instrument to increase labor participation among older individuals. In a stated choice experiment, Dutch survey respondents were asked to choose among early, late and partial retirement scenarios purged from restrictions on part-time work and gradual retirement. Retirement scenario characteristics were randomized, generating rich variation in the choice options. The stated choices are validated using revealed preference data on (planned) retirement decisions. Using the stated choice data, we estimate a model that makes the trade-offs between leisure and income over the life cycle explicit, and use the estimated model for counterfactual policy simulations. We find that, as expected, higher (full) pension eligibility ages make actuarially fair (abrupt) early retirement more attractive and make late retirement less attractive, while about one in three respondents prefer partial retirement irrespective of the eligibility age. Early retirement becomes more attractive than late retirement when individuals do not have the partial retirement option. Moreover, the partial retirement decision is sensitive to financial incentives so that subsidizing partial retirement with higher wages or with more than actuarially fair pension increases for delaying retirement increases total labor supply. These findings demonstrate the potential of partial retirement as a policy instrument to stimulate labor participation, especially when pension eligibility is delayed.