Marginal Revolution University
Published on 22 Nov 2016For most people in developed countries, retirement comes down to a choice: weighing the costs and benefits of continuing to work vs. leisure. An important factor influencing an individual’s decision is their government’s tax and retirement policies.
Most developed countries offer a government-run retirement system with benefits that kick-in at a certain age. That age varies from country to country, usually starting when a worker reaches their early sixties.
Of course, not everyone wants to retire simply because they can receive benefits. People that really love their work may choose not to retire. In some countries, though, that decision can be heavily penalized through lost retirement benefits.
Taxes on earnings plus penalties, like losing retirement benefits, gives us an implicit tax rate. Countries with higher implicit tax rates for older workers see a much lower labor force participation rate for people considered retirement age.
As you might imagine, these government policies on retirement can be extremely costly. Many European governments that penalize non-retirement have been working to reform these policies and reduce implicit tax rates for elderly workers.
In the Netherlands, which had one of the highest implicit tax rates in the 1990s, an older worker could have actually had to pay to work. Since the Netherlands reformed their policies surrounding retirement, they’ve seen an increase in the labor force participation rate for older workers.
In the next video, we’ll cover another big influence on female labor force participation: The Pill.
June 5, 2018
Taxing Work
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