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Does social security reform reduce gains from increasing the retirement age?

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  • Karolina Goraus

    ()
    (Faculty of Economic Sciences, University of Warsaw)

  • Krzysztof Makarski

    ()
    (National Bank of Poland, Warsaw School of Economics)

  • Joanna Tyrowicz

    ()
    (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)

Abstract

The objective of this paper is to analyze the welfare effects of raising the retirement age. With aging populations, in many countries de iure retirement age has been raised. With a standard assumption that individuals prefer leisure to work, such policy necessitates some welfare deterioration. This could be outweighed by lower taxation (defined benefit schemes becoming more balanced) or higher pension benefits (defined contribution schemes yield higher effective replacement rate). Moreover, it is often argued that actuarially fair pension systems provide sufficient incentives for individuals to extend the number of working years, which undermines the need to change de iure retirement age. In this paper we construct an OLG model in which we analyze welfare effects of extending the retirement age under PAYG defined benefit, PAYG defined contribution and partially funded defined contribution pension schemes. We find that such policy is universally welfare improving. However, postponed retirement translates to lower savings, which implies decrease in per capita capital and output.

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File URL: http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP120.pdf
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Bibliographic Info

Paper provided by Faculty of Economic Sciences, University of Warsaw in its series Working Papers with number 2014-03.

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Length: 25 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:war:wpaper:2014-03

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Keywords: PAYG; retirement age; pension system reform; time inconsistency; welfare;

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References

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  1. Axel Börsch-Supan & Alexander Ludwig & Joachim Winter, 2002. "Aging, pension reform and capital flows: a multi-country simulation model," Computing in Economics and Finance 2002, Society for Computational Economics 108, Society for Computational Economics.
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  13. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers, Faculty of Economic Sciences, University of Warsaw 2013-23, Faculty of Economic Sciences, University of Warsaw.
  14. Cremer, Helmuth & Pestieau, Pierre, 2002. "The Double Dividend of Postponing Retirement," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 144, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  15. Axel H. Boersch-Supan & Alexander Ludwig, 2010. "Old Europe ages: Reforms and Reform Backlashes," NBER Working Papers 15744, National Bureau of Economic Research, Inc.
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