Endogenous Retirement Behavior of Heterogeneous Households Under Pension Reforms

52 Pages Posted: 8 May 2018

See all articles by Axel H. Börsch-Supan

Axel H. Börsch-Supan

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Klaus Härtl

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Duarte Nuno Leite

Max Planck Institute for Social Law and Social Policy; Universidade do Porto - CEF.UP - Center for Economics and Finance at UP

Alexander Ludwig

Goethe University Frankfurt - Research Center SAFE; University of Cologne - Faculty of Management, Economics and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2018

Abstract

English Abstract: We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems.

German Abstract: Wir schlagen einen einheitlichen Modellrahmen vor, um die Auswirkungen von Rentenreformen auf das durchschnittliche Renteneintrittsalter und andere makroökonomische Indikatoren zu erfassen. Wir bedienen uns eines erweiterten Modells überlappender Generationen (OLG), in dem Renteneintrittsentscheidungen in einem umlagefinanzierten Rentensystem explizit modelliert werden. Das Modell lässt Heterogenität in Bezug auf Konsumpräferenzen, Lohnprofile und Überlebensraten zu. Neben den erwarteten direkten Effekten von Rentenreformen auf das Verhalten der Haushalte beobachten wir Rückkopplungseffekte. Unsere Ergebnisse zeigen, dass Verrentungsentscheidungen stark von den Anreizen und Parametern des Rentensystems wie dem gesetzlichen Renteneintrittsalter, Zu- und Abschlägen und der Ersatzrate sowie dem Zinssatz beeinflusst werden. Diese Entscheidungen haben Auswirkungen auf die Makroökonomie, was wiederum Rückkopplungen durch Gleichgewichtseffekte auf Zinssätze und Löhne bewirkt. Insgesamt haben die diskutierten Reformszenarien starke Folgen für die Nachhaltigkeit des Rentensystems. Unser Modellrahmen kann dazu verwendet werden, die Reformvorschläge nach mehreren Kriterien zu bewerten und somit Politikempfehlungen zu begründen.

Keywords: Population aging, pension reform, social security, life-cycle behavior, labor supply, retirement age, welfare

JEL Classification: C68, D91, E17, H55, J11, J26

Suggested Citation

Börsch-Supan, Axel H. and Härtl, Klaus and Leite, Duarte Nuno and Ludwig, Alexander, Endogenous Retirement Behavior of Heterogeneous Households Under Pension Reforms (April 25, 2018). MEA Discussion Paper No. 04-2018. Available at SSRN: https://ssrn.com/abstract=3172758 or http://dx.doi.org/10.2139/ssrn.3172758

Axel H. Börsch-Supan (Contact Author)

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

HOME PAGE: http://www.mea.mpisoc.mpg.de

Klaus Härtl

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany
+49-(0)89-38602-351 (Phone)

HOME PAGE: http://mea.mpisoc.mpg.de/index.php?id=230&no_cache=1&tx_meamitarbeiteranzeige_pi1[showUid]=1133&cHas

Duarte Nuno Leite

Max Planck Institute for Social Law and Social Policy ( email )

Amalienstraße 33
München, 80799
Germany

Universidade do Porto - CEF.UP - Center for Economics and Finance at UP ( email )

Rua Dr. Roberto Frias
Porto, 4200-464
Portugal

Alexander Ludwig

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

HOME PAGE: http://www.wiso.uni-koeln.de/cmr/alexludwig

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