Social security reforms and early retirement

Abstract

In order to stimulate labor market participation and improve the financial viability of the social security systems, many recent reform proposals in various OECD economies suggest to scale down the non-actuarial parts of the pension systems. These reforms have a flavour of increased efficiency at the costs of welfare losses for low income individuals. Investigating such a belief, we employ an overlapping generations model which features an endogenous retirement age and heterogenous individuals within generations. Based on a simple theoretical version of the model we demonstrate that high income individuals are likely to gain. The sign of the welfare effect for low income households is ambiguous because we do not know whether the effect of lower pension benefits is offset by the effect of a reduced tax-burden. Employing an extended CGE version of the model, which is calibrated to the Norwegian economy, we consider five reform proposals. It turns out that the various reforms which scale down the public non-actuarial pension system, lead to increases in the retirement age and steady-state welfare gains for all income classes.JEL classification: H55, H23, E62

Pension reform and labor market incentives

“…There would then be no effect on the retirement date. 16 Given the impact on retirement, the implication for economic efficiency in (27) is also clear. With a positive participation tax, retirement already occurs inefficiently early, so that an expansion of the system can only reinforce this distortion and lead to further efficiency losses.…”

An experimental test on dynamic consumption and lump-sum pensions

“…To our knowledge, this is the first experimental approach to examine a dynamic saving-consumption problem in a retirement framework. 2 In this sense, this paper also contributes to the literature on retirement behavior and pension plans (Breyer and Kifmann 2002;Fehr et al 2003;Fatas et al 2007; among others).…”

Social Security and Future Generations

“…Therefore, the identified early retirement incentive effects are only cursory. Fehr et al (2003) analyze early retirement incentives of the Norwegian pension system in a model that distinguishes five income classes within a generation.…”

“…The model distinguishes within a cohort between low, medium and high skilled labor and extends Fehr et al (2003) by including population ageing and the transition path, by considering differential mortality among the income classes and by simulating a closed economy. The study analyzes three policy options for the US which all would retain fiscal sustainability despite population ageing: a tax increase by 5.5 percentage points, a reduction of the replacement rate by 42 per cent and an increase in the full retirement age (FRA) from 65 to 73.…”

“…It is noteworthy that -in contrast to Fehr et al (2003) -Eisensee (2005 does not compare the welfare consequences of alternative policy options with and without endogenous retirement. The study mainly indicates that it is important to include endogenous retirement in policy analysis and offers important innovations in modelling and analyzing retirement choice for future work.…”