Seriously Strengthening the Tax-Benefit Link

Portugal, Pedro; Raposo, Pedro S.

Seriously Strengthening the Tax-Benefit Link

IZA Discussion Paper No. 8785

33 Pages Posted: 31 Jan 2015

See all articles by Pedro Portugal

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

Pedro S. Raposo

Tilburg University - Center for Economic Research (CentER)

Abstract

On January 1st 1994 Portugal introduced, for the first time, inflation indexation in the old-age pension formula. This change considerably decreased the uncertainty regarding the perception of the link between the stream of labor earnings and future pensions. The effect of indexation was large and, by itself, increased the expected pension amount by 28% in real terms. Individuals appear to have reacted to the policy change: labor earnings increase significantly during the eligible years approaching retirement age.

Keywords: pension policy reform, hours, earnings, tax-benefit link

JEL Classification: J14, J26, J31

Suggested Citation: Suggested Citation

Portugal, Pedro and Raposo, Pedro S., Seriously Strengthening the Tax-Benefit Link. IZA Discussion Paper No. 8785, Available at SSRN: https://ssrn.com/abstract=2558364