Retirement is the act or condition of withdrawing from the labor force at a certain age (typically between 55 and 65 years old) with the expectation of receiving public and/or private pension benefits. Contract denotes a promise or set of promises that are legally enforceable and, if violated, allow the injured party access to legal remedies. Retirement contracts are agreements signed between two parties, normally employer and employee, over terms concerning the benefits, obligations, and duties related to retirement.
Retirement contracts are highly relevant to the fields of Economics and Law because retirement is an economic decision and a contract that has legally binding force. Many researchers have studied related issues in the disciplines of Economics and Law (Bull 1987; Gustman et al. 1994; Bird 2005). A typical comprehensive retirement contract has three major contents: retirement benefits, obligations and duties, and legal statement (International Labour Office 2017; www.contractstandards.com). The content of retirement benefits may include pension benefits, severance payment, accrued vacation, equity awards, representatives and beneficiaries who receive partial/full benefits upon death, and disability severance payment. Obligations and duties may contain retirement date, consulting services after retirement, general releases of claims and promise not to sue, confidentiality obligations, return of property, noncompetition, nonsolicitation, and so on. The major elements of a legal statement may include fees and expenses, tax withholding, indemnification, adherence to legal code, limited rights to revoke, definitions, and general provisions. Not all retirement contracts are as comprehensive as aforementioned. For example, quite a number of employees can only receive a public pension as their retirement benefits in Taiwan. Among these various contents of the retirement contract, pension benefit is the item of most concern, because retirees expect to receive public and/or private pension benefits upon their time of retirement. Moreover, the starting date of the retirement contract is highly related to the age of retirement. Pension benefits and retirement age are therefore the issues most studied in the literature and will be the focus of the following discussion.
Retirement with pension benefits nowadays is considered a basic right of workers in many societies. For many western countries, this right appears in national constitutions (International Labour Standards Department 2016). Retirement benefits can come from public and/or private pension systems, which are distinguishable based on their fundamental characteristics such as contributions and the financing and management of said benefits. A private pension system is normally characterized by its defined contributions (DC), undefined benefits, fully funded financing, and private management. A public pension system tends to possess the opposite characteristics such as undefined contributions and defined benefits (DB). With an increasingly aging population, enormous financial pressure has been put on public pension systems for many countries, which now are considering (or have already implemented) pension reforms such as Germany (Berkel and Börsch-Supan 2004) and Chile (Mesa-Lago and Bertranou 2016).
The literature on pension reform indicates that governments around the world have been reducing public pensions in favor of private saving plans. Traditional defined pension benefits, designed to reward long tenure, have become steadily less common, while DC pensions, which are largely portable, are spreading in popularity. DC arrangements have replaced DB plans over time, with most OECD countries offering a multipillar approach to retirement income provision that consists of modest publicly provided pensions supplemented by tax-preferred private retirement savings (Mesa-Lago 2006; Gustafson 2017). The International Labour Organization has provided guiding principles for pension levels by setting a pension’s minimum replacement rate at 45% for an average earner with 30 years of contributions.
Most people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire due to health conditions or legislation concern (chapter “Mandatory Retirement Age Around the World” by Huang and Gu, this volume). Policy makers usually consider demography, fiscal cost of aging, health, life expectancy, nature of profession, supply of labor force, etc. when deciding the retirement age. Some countries set a mandatory retirement age at which employers are entitled to dismiss an employee. For example, the mandatory retirement age is 65 in Taiwan. Some countries set the minimum age as the lower bound to allow an employer to officially retire an employee. The minimum retirement age is 60 in Malaysia and 62 in Singapore. The USA abolished the mandatory retirement age in 1986, but there is still an age requirement of 65 for receiving any public pension from the US Social Security Administration.
There is a tendency for some countries to raise the retirement age due to labor force shortages as well as the fiscal sustainability of their pension system. From a financial point of view, an increase in the age of retirement would boost the number of contributors to the system while simultaneously reducing the number of beneficiaries. The trend of raising the retirement age has led researchers to analyze its effect on the employment of older workers, the effective retirement age, and pension benefits (Staubli and Zweimüller 2013; Lalive et al. 2017).
Future Directions of Research
Recent studies related to retirement benefits cover more extensive topics. For example, Manoli and Weber (2016) analyzed the effects of retirement benefits on labor supply decisions and estimated an increase in participation ranging from 0.1% to 0.3% in Austria. Using US data, Brown (2013) found that the increase in lifetime labor supply with respect to a 10% increase in the financial return to work would rise from less than an additional month in the short-run to less than an additional half year in the long-run. Other topics include when to begin receiving retirement benefits, how the growing inequality in life expectancy affects lifetime pension benefits (Auerbach et al. 2017), etc.
With respect to the retirement age, as baby boomers in the USA are now reaching retirement age, one of the key issues in recent literature is to examine the link between retirement age and pensions in order to provide useful findings for public officials and private pension managers. Both need to design policies that will reduce the burden of pension obligations on younger workers and shareholders, while still fulfilling the promises made to those nearing retirement.
Retirement contracts play a critical role in the retirement decision for every worker, with pension benefits and retirement age being two important aspects of the retirement contracts. Pension reform is a continuing process that ensures both the pension system is fiscally sustainable and the financial condition of the retirees is acceptable. More research studies on pension benefits and retirement age should be developed to make sure that pension reform is moving in the right direction.
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