Pension reform, employment by age, and long-run growth

Abstract

We study the effects of pension reform on hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth in a four-period OLG model. The model explains important facts well for many OECD countries. Our simulation results prefer an intelligent pay-as-you-go system above a fully funded private system. Positive effects on employment and growth are the strongest when the pay-as-you-go system includes a tight link between individual labor income and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base

Pension reform in an OLG model with heterogeneous abilities

“…The fraction of people with a tertiary degree therefore pension, on the one hand, and one's human capital and labor supply when older, on the other, introduces strong financial incentives which may bring about important changes in behavior. In this sense, our results fully confirm those of Buyse et al (2011). However, our paper also sharply clarifies the limitations of neglecting heterogeneity in people's ability.…”

“…In previous work, however, we have been able to verify that a specification like (18.a) performs better than alternative ones without quality, with a narrower definition of government expenditures, or with a different functional form (see Heylen and Van de Kerckhove, 2010;Buyse et al, 2011).…”

“…In the third period, leisure time thus consists of two parts: non-employment time before the effective retirement age / (1 − 0 ), and time in early retirement after it (1 − / ). Equation (4) then describes composite enjoyed leisure of an older worker as a CES-function of both parts (see also Buyse et al, 2011). We assume imperfect substitutability between the two leisure types.…”

“…Other papers prefer a gradual move to an actuarially neutral fully-funded private system. Often, differences in the particular specification of the model economy that is used for the analysis may explain the differences in results (Buyse et al, 2011).…”

“…First of all, about all existing studies either investigate incentives to work in a model with exogenous human capital and growth, or investigate human capital and growth while ignoring the labor-leisure choice and the endogeneity of labor supply. Buyse et al (2011) and Ludwig et al (2012) are exceptions 1 . These two studies also clearly demonstrate the importance of modelling the many mutual relationships between key variables.…”