Promoting a higher retirement age: A prospect-theoretical approach

Demographic ageing and the necessity of raising the retirement age is one of the most frequently debated topics among European welfare policy experts. This study used prospect theory as developed in behavioural economics to explain public attitudes towards pension reforms. It argues that, in line with prospect theory, negative incentives are more useful in changing people's attitudes in favour of a higher statutory retirement age than are positive incentives. Therefore, in the case of increasing life expectancy, defined-contribution schemes that apply actuarial formulae linking the level of starting monthly pension benefits to life expectancy are more useful in promoting a higher retirement age than conventional defined-benefit schemes, which typically do not forge an automatic connection between longevity and starting pensions. The implications of prospect theory for attitudes towards pension reforms were tested using Eurobarometer survey data collected in 2004 and 2009 in the Czech Republic, Poland and Slovakia.