Pension Reform and the Efficiency-Equity Trade-Off: Impacts of Removing an Early Retirement Subsidy

Asbjørn Goul Andersen, Simen Markussen and Knut Røed
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Asbjørn Goul Andersen: Ragnar Frisch Centre for Economic Research

No 12918, IZA Discussion Papers from IZA Network @ LISER

Abstract: We provide empirical evidence that the removal of work disincentives embedded in retirement earnings tests can increase old-age labor supply considerably, but it does so at the cost of more income inequality. Causal effects are identified based on a reform of the Norwegian early retirement program, which entailed that adjacent birth cohorts were exposed to completely different work incentives from age 62. The reform removed a strict retirement earnings test such that pension wealth was redistributed from early to late retirees. Given the pre-existing employment and earnings patterns, this implied a considerable rise in old-age income inequality. In principle, this could have been offset by changes in the labor supply. We estimate that the reform triggered a 42% increase in hours worked during the ages covered by early retirement options. However, as the labor supply responses were of similar magnitudes across the earnings distribution, they did little to offset the rise in inequality. As measured by the Gini coefficient, inequality in overall old-age income rose by approximately 0.03 (17%).

Keywords: pension reform; inequality; labor supply (search for similar items in EconPapers)
JEL-codes: D31 H55 J22 J26 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2020-01
New Economics Papers: this item is included in nep-age, nep-eur, nep-lma and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Labour Economics, 2021, 72, 102050

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Journal Article: Pension reform and the efficiency-equity trade-off: Impacts of removing an early retirement subsidy (2021)
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