IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp11441.html
   My bibliography  Save this paper

On Welfare Effects of Increasing Retirement Age

Author

Listed:
  • Makarski, Krzysztof

    () (Warsaw School of Economics)

  • Tyrowicz, Joanna

    () (University of Warsaw)

Abstract

We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.

Suggested Citation

  • Makarski, Krzysztof & Tyrowicz, Joanna, 2018. "On Welfare Effects of Increasing Retirement Age," IZA Discussion Papers 11441, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11441
    as

    Download full text from publisher

    File URL: http://ftp.iza.org/dp11441.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
    2. Daniel Arnold, 2013. "Benefit Morale and Cross-Country Diversity in Sick Pay Entitlements," Kyklos, Wiley Blackwell, vol. 66(1), pages 27-45, February.
    3. Hans Fehr & Wenche Irén Sterkeby & Øystein Thøgersen, 2003. "Social security reforms and early retirement," Journal of Population Economics, Springer;European Society for Population Economics, vol. 16(2), pages 345-361, May.
    4. Tyrowicz, Joanna & Smyk, Magdalena, 2017. "Wage Inequality and Structural Change," IZA Discussion Papers 11250, Institute for the Study of Labor (IZA).
    5. Cremer, Helmuth & Pestieau, Pierre, 2003. "The Double Dividend of Postponing Retirement," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 419-434, August.
    6. Roel Beetsma & Alessandro Bucciol, 2011. "Differentiating Indexation in Dutch Pension Funds," De Economist, Springer, vol. 159(3), pages 323-360, September.
    7. Shinichi Nishiyama & Kent Smetters, 2007. "Does Social Security Privatization Produce Efficiency Gains?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1677-1719.
    8. David A. Wise, 2016. "Social Security Programs and Retirement Around the World: Disability Insurance Programs and Retirement," NBER Books, National Bureau of Economic Research, Inc, number wise14-1.
    9. Assar Lindbeck & Mats Persson, 2003. "The Gains from Pension Reform," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 74-112, March.
    10. Heijdra, Ben J. & Romp, Ward E., 2009. "Retirement, pensions, and ageing," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 586-604, April.
    11. Courtney Coile & Kevin Milligan & David A. Wise, 2016. "Introduction to "Social Security Programs and Retirement Around the World: The Capacity to Work at Older Ages"," NBER Chapters,in: Social Security Programs and Retirement Around the World: The Capacity to Work at Older Ages, pages 1-33 National Bureau of Economic Research, Inc.
    12. Robert Fenge & Pierre Pestieau, 2005. "Social Security and Early Retirement," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062496, January.
    13. Börsch-Supan, Axel & Weiss, Matthias, 2016. "Productivity and age: Evidence from work teams at the assembly line," The Journal of the Economics of Ageing, Elsevier, vol. 7(C), pages 30-42.
    14. Fehr, Hans & Jokisch, Sabine & Kotlikoff, Laurence J., 2008. "Fertility, mortality and the developed world's demographic transition," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 455-473.
    15. Daniel Arnold & Tobias Brändle & Laszlo Goerke, 2014. "Sickness Absence and Works Councils - Evidence from German Individual and Linked Employer-Employee Data," IAAEU Discussion Papers 201410, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    16. 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.
    17. 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.
    18. Fehr, Hans, 2000. " Pension Reform during the Demographic Transition," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 419-443, June.
    19. 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.
    20. Fehr, Hans, 2016. "CGE modeling social security reforms," Journal of Policy Modeling, Elsevier, vol. 38(3), pages 475-494.
    21. Feldstein, Martin, 2016. "Reducing long term deficits," Journal of Policy Modeling, Elsevier, vol. 38(4), pages 632-638.
    22. 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.
    23. Jonathan Gruber & David A. Wise, 2007. "Introduction to "Social Security Programs and Retirement around the World: Fiscal Implications of Reform"," NBER Chapters,in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 1-42 National Bureau of Economic Research, Inc.
    24. Galasso, Vincenzo, 2008. "Postponing retirement: the political effect of aging," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2157-2169, October.
    25. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    longevity; PAYG; retirement age; pension system reform; welfare;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:iza:izadps:dp11441. 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: (Mark Fallak). General contact details of provider: http://www.iza.org .

    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.