Explaining retirement decisions for Spain: life course factors affecting retirement decisions based on Spanish administrative data

This paper analyses retirement decisions and their long-term effects in the sustainability of the pension system. We focus on the impact of changes in financial incentives caused by a reform of the pensions system and its interaction with life-course factors like education and work trajectories. To that propose, we use administrative data from Spain to run a model that accounts for individuals’ reactions to changes in financial incentives to retire. In a second step, we develop a microsimulation model to observe the long-term effects such decisions in terms of sustainability. The 2011 Spanish reform was based on increasing contributiveness - by adding more years to the computation of the initial pension - combined with other measures, such as delaying legal retirement age. On the other hand, work trajectories may have been strongly affected by the current economic downturn. Our hypothesis is that, in a context of low (or even negative) wage growth rates, and considering that individuals will react to the new incentives, these measures may not fully reach the desired objectives. Our results, obtained using the “Dynamic Microsimulation Pensions Model for Spain”, DyPeS, support this hypothesis. We find that the consideration of more contribution years in the computation of the initial pension amount, combined with the effect of the crisis on work trajectories, would have a positive impact on initial pension level. In line with other studies, we also find that those having a university degree are more prone to retire. This result holds in both non-behavioural and behavioural model, in which we control for labour income and financial incentives to retire.