Welfare Effects of Pension Reforms

This paper investigates the welfare effects of two types of pension reforms aimed at addressing challenges due to aging populations. The study uses a framework by Kolsrud et al. (2024), decomposing welfare into consumption smoothing and fiscal externality effects. Norwegian administrative data is used to study the welfare effects of two reforms. The first is a hypothetical budget-neutral reform steepening pension incentives, which rewards late retirees. The second is the 2011 Norwegian old-age pension flexibility reform. We find that the first (hypothetical) reform is regressive. Based on consumption differences, such a reform incurs substantial consumption smoothing costs and results in significant overall welfare costs (0.4–0.5 NOK per 1 NOK transferred), highlighting the negative welfare impact of heavily penalizing early retirement. Conversely, the 2011 Norwegian old-age pension flexibility reform, which lowered the eligibility age (from age 67 to age 62) had a near-zero effect on total labor supply. Quasi-experimental evidence suggests this reform shifted the consumption distribution upwards and resulted in welfare gains, estimated at around NOK 138,000 per affected individual.