Endogenous Retirement Behavior of Heterogeneous Households Under Pension Reforms

Börsch-Supan, Axel (), Härtl, Klaus (), Duarte Semedo Leite and Alexander Ludwig

No 201804, MEA discussion paper series from Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy

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.

JEL-codes: C68 D91 E17 H55 J11 J26 (search for similar items in EconPapers)
Date: 2018-04-25
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
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Working Paper: Endogenous retirement behavior of heterogeneous households under pension reforms (2018)
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