Review of Income and Wealth

I estimate the effect of benefit reductions on the timing of retirement. The introduction of actuarialadjustments in the German public pension system serves as a source of exogenous variation to estimatediscrete time transition rates into retirement for individuals of age 60–66. Responses to benefit reduc-tions are elaborated separately for manual and non-manual workers. On average, individuals postponeretirement by 13.2 months if pension benefits are reduced by 3.6 percent for each year of early retire-ment. This result is in line with the previous quasi-experimental literature and suggests that peoplerespond to the incentive of reducing the implicit tax on further periods of work. However, among menthe response is about 50 percent lower for manual workers compared to non-manual workers. Surpris-ingly, this does not necessarily indicate that retirement incomes of manual workers deteriorate. Theexplanation is that disability pensions are available at age 63—without benefit reductions.