Retirement Responses to a Generous Pension Reform: Evidence from a Natural Experiment in Eastern Europe

66 Pages Posted: 8 Feb 2010

See all articles by Alexander M. Danzer

Alexander M. Danzer

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; IZA Institute of Labor Economics

Abstract

The retirement decision is under researched in developing and emerging countries, despite the topic's close relation to many development issues such as poverty reduction and social security, and despite the fact that population ageing will increasingly challenge the developing world. This paper uses a natural experiment from Ukraine to estimate the causal effect of a threefold increase in the legal minimum pension on labor supply and retirement behaviour at older ages. Applying difference-in-difference and regression discontinuity methods on two independent nationally representative data sets, the paper estimates a pure income effect that caused additional retirement of 30 to 47 percent. Additional evidence suggests that retirement incentives are stronger at the lower tail of the educational distribution and that the strict Labor Code curbed responses at the intensive labor supply margin. Although the substantial pension increase provided strong disincentives to work and put a heavy fiscal burden on Ukraine, it significantly reduced the propensity of falling into poverty for those in retirement.

Keywords: labor supply, retirement, minimum pension, pure income effect, poverty, difference-in-differences, regression discontinuity

JEL Classification: J26, I38, O15

Suggested Citation

Danzer, Alexander M., Retirement Responses to a Generous Pension Reform: Evidence from a Natural Experiment in Eastern Europe. IZA Discussion Paper No. 4726, Available at SSRN: https://ssrn.com/abstract=1549202 or http://dx.doi.org/10.2139/ssrn.1549202

Alexander M. Danzer (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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