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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 Boersch-Supan & Alexander Ludwig & Joachim Winter, 2005. "Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model," NBER Working Papers 11850, National Bureau of Economic Research, Inc.
  2. Börsch-Supan, Axel & Weiss, Matthias, 2011. "Productivity and age: Evidence from work teams at the assembly line," MEA discussion paper series 07148, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Futagami, Koichi & Nakajima, Tetsuya, 2001. "Population Aging and Economic Growth," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 31-44, January.
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  6. Axel Börsch-Supan & Alexander Ludwig, 2010. "Old Europe Ages: Reforms and Reform Backlashes," NBER Chapters, in: Demography and the Economy, pages 169-204 National Bureau of Economic Research, Inc.
  7. Galasso, Vincenzo, 2008. "Postponing retirement: the political effect of aging," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2157-2169, October.
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  11. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers 2013-23, Faculty of Economic Sciences, University of Warsaw.
  12. Bouzahzah, Mohamed & De la Croix, David & Docquier, Frederic, 2002. "Policy reforms and growth in computable OLG economies," Journal of Economic Dynamics and Control, Elsevier, vol. 26(12), pages 2093-2113, October.
  13. Annabi, Nabil & Harvey, Simon & Lan, Yu, 2011. "Public expenditures on education, human capital and growth in Canada: An OLG model analysis," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 852-865.
  14. Jonathan Gruber & David A. Wise, 2007. "Social Security Programs and Retirement around the World: Fiscal Implications of Reform," NBER Books, National Bureau of Economic Research, Inc, number grub07-1, octubre-d.
  15. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, December.
  16. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
  17. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2012. "Pension reform with variable retirement age: a simulation analysis for Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(03), pages 389-417, July.
  18. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, vol. 157(4), pages 359-416, December.
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