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http://ssrn.com/abstract=1916585
 
 

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Longevity, Life-Cycle Behavior and Pension Reform


Peter Haan


DIW Berlin, German Institute for Economic Research; Institute for the Study of Labor (IZA)

Victoria L. Prowse


Cornell University - Department of Economics; Institute for the Study of Labor (IZA); German Institute for Economic Research (DIW Berlin)

July 18, 2013


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.

Number of Pages in PDF File: 40

Keywords: life expectancy, public pension reform, retirement, employment, life-cycle models, consumption, tax and transfer system

JEL Classification: D91, J11, J22, J26, J64

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Date posted: August 25, 2011 ; Last revised: July 23, 2013

Suggested Citation

Haan, Peter and Prowse, Victoria L., Longevity, Life-Cycle Behavior and Pension Reform (July 18, 2013). Available at SSRN: http://ssrn.com/abstract=1916585 or http://dx.doi.org/10.2139/ssrn.1916585

Contact Information

Peter Haan (Contact Author)
DIW Berlin, German Institute for Economic Research ( email )
Mohrenstraße 58
Berlin, 10117
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Victoria L. Prowse
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
German Institute for Economic Research (DIW Berlin) ( email )
Mohrenstraße 58
Berlin, 10117
Germany
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