Income, Consumption, and Savings Around Retirement

Abstract

This paper studies the evolution of household income, consumption, and savings around retirement in the context of a major reform of the public pension system in Norway. The 2011 reform implied a substantial increase in work incentives for workers covered by the early retirement scheme AFP and a reduction in the early retirement age for workers not covered by AFP, and more flexibility in terms of pension claiming and retirement decisions for both groups of workers. These changes in incentives and choice sets allow us to provide new evidence on the links between the structure of public pension systems and household consumption and savings behavior around retirement. Difference-in-differences analyses around the early retirement age reveal substantial positive reform impacts on household net income. The positive impacts on household net income are passed through to both savings and consumption, and contribute to a flattening of consumption profiles for workers faced with the flexible post-reform system. Event study analyses around retirement reveal decreasing consumption profiles for pre-reform cohorts and flat profiles for post-reform cohorts. These findings suggest that the flexible post-reform pension system leaves workers in a better position to maintain their pre-retirement levels of consumption than the more rigid pre-reform system.

Keywords: pension reform, consumption, Savings