Endogenous Retirement Behavior of Heterogeneous Households Under Pension Reforms

52 Pages Posted: 31 Aug 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

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.

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). SAFE Working Paper No. 221. Available at SSRN: https://ssrn.com/abstract=3235142 or http://dx.doi.org/10.2139/ssrn.3235142

Axel H. Börsch-Supan

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 (Contact Author)

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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