Progressive Pensions as an Incentive for Labor Force Participation

Fabian Kindermann and Veronika Pueschel

No 16380, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we challenge the conventional idea that an increase in the progressivity of old-age pensions unanimously distorts the labor supply decision of households. So far, the literature has argued that higher pension progressivity leads to more redistribution and insurance provision on the one hand, but increases implicit taxes and therefore distorts labor supply choices on the other. In contrast, we show that a well-designed reform of the pension system has the potential to encourage labor force participation. We propose a progressive pension component linked to the employment decision of households, which implicitly subsidizes employment of the productivity poor. A simulation analysis in a quantitative stochastic overlapping generations model with productivity and longevity risk indicates that this positive employment effect can be sizable and welfare enhancing.

JEL-codes: D15 H31 H55 J21 J22 (search for similar items in EconPapers)
Date: 2021-07
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Working Paper: Progressive Pensions as an Incentive for Labor Force Participation (2021)
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