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Longevity, Life-Cycle Behavior and Pension Reform

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  • Peter Haan
  • Victoria Prowse

Abstract

How can public pension systems be reformed to ensure fiscal stability in the face of increasing life expectancy? To address this pressing open question in public finance, we estimate a life-cycle model in which the optimal employment, retirement and consumption decisions of forward-looking individuals depend, inter alia, on life expectancy and the design of the public pension system. We calculate that, in the case of Germany, the fiscal consequences of the 6.4 year increase in age 65 life expectancy anticipated to occur over the 40 years that separate the 1942 and 1982 birth cohorts can be offset by either an increase of 4.34 years in the full pensionable age or a cut of 37.7% in the per-year value of public pension benefits. Of these two distinct policy approaches to coping with the fiscal consequences of improving longevity, increasing the full pensionable age generates the largest responses in labor supply and retirement behavior.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1140.

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Length: 39 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diwwpp:dp1140

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Keywords: Life expectancy; public pension reform; retirement; employment; life-cycle models; consumption; tax and transfer system;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Sustainable retirement pension reform?
    by Economic Logician in Economic Logic on 2011-08-15 14:42:00
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Cited by:
  1. Benítez-Silva, Hugo. & García Pérez, Jose Ignacio & Jiménez Martín, Sergi, 2011. "The Effects of Employment Uncertainty and Wealth Shocks on the Labor Supply and Claiming Behavior of Older American Workers," Working Papers 2011-09, FEDEA.
  2. Peter Haan & Victoria Prowse, 2011. "Longevity, Life-Cycle Behavior and Pension Reform," Discussion Papers of DIW Berlin 1140, DIW Berlin, German Institute for Economic Research.
  3. David de la Croix & Olivier Pierrard & Henri R. Sneessens, 2010. "Aging and Pensions in General Equilibrium: Labor Market Imperfections Matter," CREA Discussion Paper Series 10-09, Center for Research in Economic Analysis, University of Luxembourg.
  4. Daniel Kemptner, 2013. "Health-Related Life Cycle Risks and Public Insurance," Discussion Papers of DIW Berlin 1320, DIW Berlin, German Institute for Economic Research.
  5. Lüthen, Holger, 2014. "Rates of return and early retirement disincentives: Evidence from a German pension reform," Discussion Papers 2014/15, Free University Berlin, School of Business & Economics.

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