Earnings Test, Non-Actuarial Adjustments and Flexible Retirement

50 Pages Posted: 25 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

Date Written: February 2018

Abstract

In response to the challenges of increasing longevity, an obvious policy response is to gradually increase the statutory eligibility age for public pension benefits and to shut down pathways to early retirement such as special rules for women. This is, however, very unpopular. As an alternative, many countries have introduced “flexibility reforms” which allow combining part-time work and partial retirement. A key measure of these reforms is the abolishment of earnings tests. It is claimed that these reforms increase labor supply and therefore, also the sustainability of pension systems. We show that these claims may not be true in the circumstances of most European countries.To this end, we employ a life-cycle model of consumption and labor supply where the choices of labor force exit and benefit claiming age are endogenous and potentially separate. Earnings tests force workers to exit the labor market when claiming a pension. After abolishing the earnings test, workers can claim their benefits and can keep on working, potentially increasing labor supply. Our key result is that the difference between exit and claiming age strongly depends on the actuarial neutrality of the pension system and can become very large. Abolishing an earnings test as part of a “flexibility reform” may therefore create more labor supply but at the same time, reduce the average claiming age when adjustments remain less than actuarial, thereby worsening rather than improving the sustainability of public pension systems.

Suggested Citation

Börsch-Supan, Axel H. and Härtl, Klaus and Leite, Duarte Nuno, Earnings Test, Non-Actuarial Adjustments and Flexible Retirement (February 2018). NBER Working Paper No. w24294. Available at SSRN: https://ssrn.com/abstract=3181743

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

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