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Public pensions and labor supply over the life cycle

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  • Eric French
  • John Bailey Jones

Abstract

Virtually all developed countries face projected budget shortfalls for their public pension programs. The shortfalls arise for two reasons. First, populations in developed countries are aging rapidly. Second, until recently older individuals in developed countries have been retiring earlier. These two developments have created serious strains on public pension programs. In order to remain fiscally solvent, many governments have reformed their public pension schemes to encourage labor supply at older ages. These reforms include reductions in the generosity of public pensions and reduced penalties for working past the normal retirement age. In this paper, we consider how reforms to public pension systems affect labor supply over the life cycle. We put the recent empirical evidence on the effect of government pensions on labor supply in a life cycle context, and we present evidence on the effectiveness of tax reforms for stimulating labor supply over the life cycle. Our main conclusion is that the labor supply of older workers is responsive to changes in retirement incentives. The labor supply of younger workers is less responsive. Thus the trend towards lower taxes on older workers in many developed countries is likely to continue to fuel the recent trend towards later retirement. This, in turn, is likely to reduce the financial strain on public pension schemes.

Suggested Citation

  • Eric French & John Bailey Jones, 2010. "Public pensions and labor supply over the life cycle," Working Paper Series WP-2010-09, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2010-09
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    References listed on IDEAS

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    Cited by:

    1. Allard, Julien & Catenaro, Marco & Vidal, Jean-Pierre & Wolswijk, Guido, 2013. "Central bank communication on fiscal policy," European Journal of Political Economy, Elsevier, pages 1-14.
    2. Richard Blundell, 2016. "Coase Lecture—Human Capital, Inequality and Tax Reform: Recent Past and Future Prospects," Economica, London School of Economics and Political Science, vol. 83(330), pages 201-218, April.
    3. repec:mea:meawpa:12257 is not listed on IDEAS
    4. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers 38, Directorate General Taxation and Customs Union, European Commission.
    5. Alpert, Abby & Powell, David, 2014. "Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes?," Working Papers 987-1, RAND Corporation.
    6. Haan, Peter & Prowse, Victoria, 2014. "Longevity, life-cycle behavior and pension reform," Journal of Econometrics, Elsevier, pages 582-601.
    7. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2014. "Aging and pension reform: Extending the retirement age and human capital formation," SAFE Working Paper Series 82, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    8. John Bailey Jones & Fang Yang, 2016. "Skill-Biased Technical Change and the Cost of Higher Education," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 621-662.
    9. Vogel, Edgar & Ludwig, Alexander & Börsch-Supan, Axel, 2017. "Aging and pension reform: extending the retirement age and human capital formation," Journal of Pension Economics and Finance, Cambridge University Press, pages 81-107.
    10. repec:eee:hapoch:v1_713 is not listed on IDEAS
    11. repec:eee:chieco:v:44:y:2017:i:c:p:16-29 is not listed on IDEAS
    12. repec:eee:hapoch:v1_457 is not listed on IDEAS
    13. Cory Koedel & P. Brett Xiang, 2017. "Pension Enhancements and the Retention of Public Employees," ILR Review, Cornell University, ILR School, pages 519-551.
    14. Cory Koedel & P. Brett Xiang, 2017. "Pension Enhancements and the Retention of Public Employees," ILR Review, Cornell University, ILR School, pages 519-551.

    More about this item

    Keywords

    Labor supply ; Pensions ; Retirement;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • 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
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy

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