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Longevity, Life-Cycle Behavior and Pension Reform

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  • Haan, Peter

    ()
    (DIW Berlin)

  • Prowse, Victoria

    ()
    (Cornell University)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5858.

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Length: 43 pages
Date of creation: Jul 2011
Date of revision:
Publication status: published in: Journal of Econometrics, 2014, 178(3), 582-601
Handle: RePEc:iza:izadps:dp5858

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

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References

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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. Daniel Kemptner, 2013. "Health-Related Life Cycle Risks and Public Insurance," Discussion Papers of DIW Berlin 1320, DIW Berlin, German Institute for Economic Research.
  3. Haan, Peter & Prowse, Victoria, 2011. "Longevity, Life-Cycle Behavior and Pension Reform," IZA Discussion Papers 5858, Institute for the Study of Labor (IZA).
  4. de la CROIX, David & PIERRARD, Olivier & SNEESSENS, Henri R., . "Aging and pensions in general equilibrium: labor market imperfections matter," CORE Discussion Papers RP -2495, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Holger Lüthen, 2014. "Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform," Discussion Papers of DIW Berlin 1389, DIW Berlin, German Institute for Economic Research.
  6. 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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