Public Pensions and Labor Supply Over the Life Cycle

34 Pages Posted: 7 Nov 2010

See all articles by Eric French

Eric French

Department of Economics; Institute for Fiscal Studies (IFS)

John Bailey Jones

Federal Reserve Bank of Richmond; SUNY at Albany - School of Business

Date Written: August 31, 2010

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.

Keywords: pensions, Social Security, labor supply, retirement

JEL Classification: J22, J26, J48

Suggested Citation

French, Eric and Jones, John B., Public Pensions and Labor Supply Over the Life Cycle (August 31, 2010). FRB of Chicago Working Paper No. 2010-09. Available at SSRN: https://ssrn.com/abstract=1703540 or http://dx.doi.org/10.2139/ssrn.1703540

Eric French (Contact Author)

Department of Economics ( email )

Gower Street
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United Kingdom

Institute for Fiscal Studies (IFS) ( email )

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John B. Jones

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804 697-8206 (Phone)

HOME PAGE: http://www.albany.edu/~jbjones

SUNY at Albany - School of Business ( email )

Bus Admin 110
1400 Washington Avenue
Albany, NY 12222
518-442-4926 (Phone)

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