Early retirement via the disability insurance was modeled using a discrete choice model (Bo-lin et al, 2008b). The choice of explanatory variables reflects our view that exit from the labor market via the disability insurance is involuntary and determined by the health status. The explanatory variables thus capture health risks rather than economic incentives.

The literature on retirement suggests a few different approaches to model old-age retirement, see for instance the discussion in section 4 of Bolin et al (2008b). We might distinguish between the life-time budget constraint approach, the option value approach and the hazard model approach. In the life-time budget constraint approach each individual faces a discontinuous or kinked life-time budget constraint, and is assumed to choose the retirement age which gives the utility maximizing combination of leisure and life-cycle income. In the option value approach each individual is assumed to compute the expected gain (loss) in utility from postponing retirement one or more years. The hazard model approach is a reduced form approach which usually only considers information one period ahead. The probability to retire for a person who is currently active is typically a function of annual wage earnings, pension accruals and pension wealth, health status, age and gender.

The first two approaches are very computer intensive, and for this reason difficult to include in a microsimulation model. Even with modern fast computers simulations would take too long. The limited information available in SESIM and its intrinsic chronological structure also contributed to our decision to use a discrete choice model for early old-age retirement as well as for retirement via the disability insurance.

When looking at data the research group discovered that some individuals, who retired before 65, got a higher pension than their contracts stipulated. A closer analysis of the retirement situation revealed that some employees, typically in the age bracket 55-65, got early retirement offers from their employers, so called “golden handshakes”. This was a way to get rid of white collar employees and reduce the expenses for both salaries and pension contributions, which tend to increase with increasing age. To estimate a discrete choice model for the private decision to retire without taking these offers from employers into account would in general bias the estimates. For this reason a model for the probability to get an offer was also estimated and made part of the entire model structure.

When simulating the retirement model, we start with withdrawal through the disability insurance. The population at risk consists of everyone in the labor force. After those who are simulated to get disability insurance have been dropped from the labor force, those who remain are at risk for early old-age retirement. Those who remain in the labor force at the age of 65 are all assumed to retire at that age. The model can be simulated with and without early retirement offers from employers. It is also possible to extend the age span for market work beyond the age of 65.

Figures 3.5.3 and 3.5.4 give examples of simulation output. The first of these figures show the simulated population shares in work, old-age retirement and on disability insurance from year 2000 to 2040. The share in old-age retirement will increase from about 18 per cent in 2000 to about 25 percent in 2040, while the share in work decreases from 45 per cent to 42 per cent. The marginal decline in the share of disability insurance is probably the combined result of