Reference Dependence in Retirement Behavior: Evidence from German Pension Discontinuities

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This paper documents and analyzes an important and puzzling stylized fact about retirement behavior: the large concentration of job exits at specific ages. In Germany, around 30% of workers retire precisely in the month when they reach one of three “statutory” retirement ages, although there is often no incentive or even a disincentive to retire at these thresholds. To study what can explain the concentration of retirements around statutory ages, I use novel administrative data covering the universe of German retirees, and I take advantage of unique variation in retirement incentives as well as in the location of statutory ages across individuals created by the German pension system. Measuring retirement bunching responses to more than 600 different discontinuities in pension benefit profiles, I first document that financial incentives alone fail to explain retirement patterns in the data. Second, I show that there is a direct effect of “presenting” a threshold as a statutory age, which is substantially larger than that of financial incentives. Further evidence on mechanisms suggests the framing of statutory ages as reference points for retirement as a potential explanation. A number of alternative channels including firm responses are also discussed but they do not seem to drive the results. Finally, a model of retirement with reference-dependent decision utility is employed to interpret the observed patterns. Counterfactual simulations highlight that shifting statutory ages via pension reforms can be an effective policy to increase actual retirement ages with a positive fiscal impact.