IDEAS home Printed from https://ideas.repec.org/a/eee/econom/v178y2014ip3p582-601.html
   My bibliography  Save this article

Longevity, life-cycle behavior and pension reform

Author

Listed:
  • Haan, Peter
  • Prowse, Victoria

Abstract

How can public pension systems be reformed to ensure fiscal stability in the face of increasing life expectancy? To address this question, we use micro data to estimate a structural life-cycle model of individuals’ employment, retirement and consumption decisions. We calculate that, in the case of Germany, an increase of 3.76 years in the pension age thresholds or a cut of 26.8% in the per-year value of public pension benefits would offset the fiscal consequences of the increase in life expectancy anticipated to occur over the next 40 years. On average, individuals value the increase in the pension age thresholds at 3.44% of baseline consumption, and are willing to forgo 8.51% of baseline consumption to avoid the cut in per-year pension value. The increase in the pension age thresholds makes 87.7% of individuals better-off, and generates large responses in labor supply and retirement behavior. However, the favorable effects of this reform depend on the availability of jobs for older individuals.

Suggested Citation

  • Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
  • Handle: RePEc:eee:econom:v:178:y:2014:i:p3:p:582-601
    DOI: 10.1016/j.jeconom.2013.08.038
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304407613002042
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul Frijters & Bas van der Klaauw, 2006. "Job Search with Nonparticipation," Economic Journal, Royal Economic Society, vol. 116(508), pages 45-83, January.
    2. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    3. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
    4. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    5. Bonin, Holger, 2009. "15 Years of Pension Reform in Germany: Old Successes and New Threats," IZA Policy Papers 11, Institute for the Study of Labor (IZA).
    6. Jérôme Adda & Christian Dustmann & Katrien Stevens, 2017. "The Career Costs of Children," Journal of Political Economy, University of Chicago Press, vol. 125(2), pages 293-337.
    7. Rafael Lalive & Jan Van Ours & Josef Zweimuller, 2006. "How Changes in Financial Incentives Affect the Duration of Unemployment," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1009-1038.
    8. Gustman, Alan L & Steinmeier, Thomas L, 1986. "A Structural Retirement Model," Econometrica, Econometric Society, vol. 54(3), pages 555-584, May.
    9. Yuanreng Hu & Noreen Goldman, 1990. "Mortality Differentials by Marital Status: An International Comparison," Demography, Springer;Population Association of America (PAA), vol. 27(2), pages 233-250, May.
    10. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    11. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 85-118, Suppl. De.
    12. Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, July.
    13. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, February.
    14. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    15. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
    16. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
    17. Fuchs-Schundeln, Nicola & Alesina, Alberto, 2007. "Good-Bye Lenin (Or Not?): The Effect of Communism on People's Preferences," Scholarly Articles 4553032, Harvard University Department of Economics.
    18. Michael Baker & Mark Stabile & Catherine Deri, 2004. "What Do Self-Reported, Objective, Measures of Health Measure?," Journal of Human Resources, University of Wisconsin Press, vol. 39(4).
    19. Haan, Peter & Prowse, Victoria L., 2010. "The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-Cycle Model," IZA Discussion Papers 4792, Institute for the Study of Labor (IZA).
    20. Richard Blundell & Costas Meghir & Sarah Smith, 2002. "Pension Incentives and the Pattern of Early Retirement," Economic Journal, Royal Economic Society, vol. 112(478), pages 153-170, March.
    21. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    22. FFF1Tapani NNN1Valkonen & FFF2Pekka NNN2Martikainen & FFF2Jenni NNN2Blomgren, 2004. "Increasing excess mortality among non-married elderly people in developed countries," Demographic Research Special Collections, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 2(12), pages 305-330, April.
    23. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, May.
    24. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 851-882, June.
    25. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-672, November.
    26. Richard Disney & Sarah Smith, 2002. "The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom," Economic Journal, Royal Economic Society, vol. 112(478), pages 136-152, March.
    27. Alberto Alesina & Nichola Fuchs Schuendeln, 2005. "Good bye Lenin (or not?): The Effect of Communism on People's Preferences," NBER Working Papers 11700, National Bureau of Economic Research, Inc.
    28. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1.
    29. Michael D. Hurd & Kathleen McGarry, 2002. "The Predictive Validity of Subjective Probabilities of Survival," Economic Journal, Royal Economic Society, vol. 112(482), pages 966-985, October.
    30. van der Klaauw, Wilbert & Wolpin, Kenneth I., 2008. "Social security and the retirement and savings behavior of low-income households," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 21-42, July.
    31. Holger Bonin, 2009. "15 Years of Pension Reform in Germany: Old Successes and New Threats," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(4), pages 548-560, October.
    32. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, May.
    33. Gan, Li & Gong, Guan & Hurd, Michael & McFadden, Daniel, 2015. "Subjective mortality risk and bequests," Journal of Econometrics, Elsevier, vol. 188(2), pages 514-525.
    34. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
    35. Arjan Gjonca & Hilke Brockmann & Heiner Maier, 2000. "Old-Age Mortality in Germany prior to and after Reunification," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 3(1), July.
    36. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
    37. Gustman, Alan L. & Steinmeier, Thomas L., 2005. "The social security early entitlement age in a structural model of retirement and wealth," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 441-463, February.
    38. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    39. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Life Expectancy and Old Age Savings," American Economic Review, American Economic Association, vol. 99(2), pages 110-115, May.
    40. Eric French & John Jones, 2012. "Public pensions and labor supply over the life cycle," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(2), pages 268-287, April.
    41. Nicola Fuchs-Schündeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," Working Papers, Center for Retirement Research at Boston College wp2008-21, Center for Retirement Research, revised Dec 2008.
    42. Martin Spieß & Martin Kroh, 2008. "Documentation of Sample Sizes and Panel Attrition in the German Socio Economic Panel (SOEP) (1984 until 2006)," Data Documentation 27, DIW Berlin, German Institute for Economic Research.
    43. Nolte, Ellen & Scholz, Rembrandt & Shkolnikov, Vladimir & McKee, Martin, 2002. "The contribution of medical care to changing life expectancy in Germany and Poland," Social Science & Medicine, Elsevier, vol. 55(11), pages 1905-1921, December.
    44. Robert Haveman & Philip de Jong & Barbara Wolfe, 1991. "Disability Transfers and the Work Decision of Older Men," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 939-949.
    45. Arjan Heyma, 2004. "A structural dynamic analysis of retirement behaviour in the Netherlands," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 739-759.
    46. Nicola Fuchs-Schündeln & Matthias Schündeln, 2005. "Precautionary Savings and Self-Selection: Evidence from the German Reunification "Experiment" Abstract: We combine particular features of the German civil service with the unique event of Ge," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 1085-1120.
    47. Axel Boersch-Supan & Christina B. Wilke, 2004. "The German Public Pension System: How it Was, How it Will Be," NBER Working Papers 10525, National Bureau of Economic Research, Inc.
    48. Borsch-Supan, Axel & Schnabel, Reinhold, 1998. "Social Security and Declining Labor-Force Participation in Germany," American Economic Review, American Economic Association, vol. 88(2), pages 173-178, May.
    49. 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.
    50. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
    51. Gruber, Jonathan & Wise, David, 1998. "Social Security and Retirement: An International Comparison," American Economic Review, American Economic Association, vol. 88(2), pages 158-163, May.
    52. Blau, David M, 1994. "Labor Force Dynamics of Older Men," Econometrica, Econometric Society, vol. 62(1), pages 117-156, January.
    53. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
    54. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
    55. Martin Kroh & Martin Spieß, 2008. "Documentation of Sample Sizes and Panel Attrition in the German Socio Economic Panel (SOEP) (1984 until 2007)," Data Documentation 39, DIW Berlin, German Institute for Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. de la Croix, David & Pierrard, Olivier & Sneessens, Henri R., 2013. "Aging and pensions in general equilibrium: Labor market imperfections matter," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 104-124.
    2. Eric French & John Bailey Jones, 2017. "Health, Health Insurance, and Retirement: A Survey," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 383-409, September.
    3. Ihle, Dorothee, 2017. "Quantile treatment effects of Riester participation on wealth," CAWM Discussion Papers 96, University of Münster, Center of Applied Economic Research Münster (CAWM).
    4. Holger Lüthen, 2016. "Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform," German Economic Review, Verein für Socialpolitik, vol. 17(2), pages 206-233, May.
    5. Alfonso Sánchez-Martin & J. García-Pérez & Sergi Jiménez-Martín, 2014. "Delaying the Normal and Early Retirement Ages in Spain: Behavioural and Welfare Consequences for Employed and Unemployed Workers," De Economist, Springer, vol. 162(4), pages 341-375, December.
    6. Axel Börsch-Supan & Tabea Bucher-Koenen & Michela Coppola & Bettina Lamla, 2015. "Savings In Times Of Demographic Change: Lessons From The German Experience," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 807-829, September.
    7. Haan, Peter & Prowse, Victoria L., 2015. "Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings," IZA Discussion Papers 8980, Institute for the Study of Labor (IZA).
    8. repec:eee:labeco:v:51:y:2018:i:c:p:25-37 is not listed on IDEAS
    9. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Zou, Tieding, 2017. "延迟退休的制约因素、政策效果与动态研究方法评价
      [Restriction, Policy Effect and Dynamic Research Method to Delay Retirement]
      ," MPRA Paper 85556, University Library of Munich, Germany, revised 30 Jan 2018.
    11. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, vol. 178(P3), pages 582-601.
    12. de la Croix, David & Pierrard, Olivier & Sneessens, Henri R., 2013. "Aging and pensions in general equilibrium: Labor market imperfections matter," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 104-124.
    13. Kemptner, Daniel & Haan, Peter & Prowse, Victoria, 2015. "Inequality and Defined Benefit Pensions when Life Expectancy is Heterogeneous," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112867, Verein für Socialpolitik / German Economic Association.
    14. Bönke, Timm & Kemptner, Daniel & Lüthen, Holger, 2018. "Effectiveness of early retirement disincentives: Individual welfare, distributional and fiscal implications," Labour Economics, Elsevier, vol. 51(C), pages 25-37.
    15. repec:eee:chieco:v:44:y:2017:i:c:p:16-29 is not listed on IDEAS
    16. Michele Belloni & Rob Alessie, 2013. "Retirement Choices in Italy: What an Option Value Model Tells Us," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 499-527, August.
    17. Songül Tolan, 2017. "The Effect of Partial Retirement on Labor Supply, Public Balances and the Income Distribution: Evidence from a Structural Analysis," Discussion Papers of DIW Berlin 1679, DIW Berlin, German Institute for Economic Research.
    18. Irina Merkurieva, 2016. "Late Career Job Loss and the Decision to Retire," Discussion Paper Series, Department of Economics 201606, Department of Economics, University of St. Andrews.
    19. repec:eee:hapoch:v1_457 is not listed on IDEAS
    20. Haan, Peter & Prowse, Victoria, 2014. "Optimal Unemployment Insurance and Welfare Benefits in a Life-cycle model of Family Labor Supply and Savings," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100625, Verein für Socialpolitik / German Economic Association.
    21. Daniel Kemptner, 2013. "Health-Related Life Cycle Risks and Public Insurance," SOEPpapers on Multidisciplinary Panel Data Research 583, DIW Berlin, The German Socio-Economic Panel (SOEP).
    22. Kemptner, Daniel & Timm, Boenke & Holger, Luethen, 2014. "The introduction of disincentives for early retirement and its effect on labor market participation," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100446, Verein für Socialpolitik / German Economic Association.
    23. Dorothee Ihle, 2017. "Quantile Treatment Effects of Riester Participation on Wealth," SOEPpapers on Multidisciplinary Panel Data Research 954, DIW Berlin, The German Socio-Economic Panel (SOEP).
    24. Endler, Johannes & Geyer, Johannes, 2017. "The Interaction of Pension System and Unemployment Insurance - Evidence from two Reforms," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168279, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Life expectancy; Public pension reform; Retirement; Employment; Life-cycle models; Consumption; Tax and transfer system;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:178:y:2014:i:p3:p:582-601. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jeconom .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.