The demographic transition in industrialized countries poses challenges to the pension system which is essentially organized according to the pay-as-you-go principle in most countries. This paper aims at analyzing two proposals for pension reform in a theoretical model that endogenously explains the retirement and training decision of workers who are heterogeneous in ability. Because the economic benefits of motivating late retirement strongly depend on the employment prospects of workers near retirement age, the model includes the firms' employment decision at the extensive margin. The first reform proposal, the implementation of individual retirement accounts, increases the workers' incentives to acquire skills and to postpone retirement. However, if the capital funded pillar of the pension system becomes strong, low-ability workers may not attain their optimal retirement age because firms refuse to employ them any longer. In a similar manner, the second reform proposal to increase the minimum retirement age may not work for lowability workers if their separation date is determined by the firms before the minimum retirement age is achieved.
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Find related papers by JEL classification: D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
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