Does raising the pension age prolong working life? Evidence from pension age reform in Estonia

Orsolya Soosaar,Allan Puur,Lauri Leppik

doi:10.1017/s1474747220000244

Abstract

AbstractWe estimate how raising the statutory retirement age affects employment by considering the pension age reform in Estonia, that gradually raised the normal retirement age (NRA) for women from 58 to 61.5 and the early retirement age (ERA) from 56 to 59.5 during the period of 2001–2011. The analysis employs a difference-in-differences estimation strategy on register data covering women born between 1943 and 1952. The reform did have an impact on the employment rate of affected women, with an estimated increase of 4.1 percentage points associated with the rise in the NRA, and 3.4 percentage points with the rise in the ERA. These estimates are at the lower end of those found in previous studies for other countries, pointing to the role of contextual features such as lower replacement rates and fewer disincentives to work while drawing pensions.

Highlights

Demographic trends of ageing are raising the pressure on the fiscal sustainability of public pension systems in most industrialised countries
To put the magnitude of the effect into perspective, the employment rate in the year before reaching the normal retirement age (NRA) was in the range of 54–63% and before reaching the early retirement age (ERA) in the range of 67–72% depending on the cohort
Raising the retirement age reduces social security wealth, which should increase the labour supply in response; tax incentives that encourage individuals to retire at the statutory retirement age could be shifted towards a later age; liquidity constraints can stop people from withdrawing from the labour market before they become eligible for an old-age pension; and changing the statutory retirement age might have a signalling effect that it is appropriate to retire at a later age

Summary

Introduction

Demographic trends of ageing are raising the pressure on the fiscal sustainability of public pension systems in most industrialised countries. In the European Union, most member states have either raised their pension age over recent decades or are currently in the process of doing so gradually. An important goal of the pension age reforms aside from fiscal savings is to increase the labour supply of older individuals. Pension age reforms have become common in Europe, empirical investigations into the actual labour market outcomes of these reforms are so far available only for a limited number of Western European countries (e.g., Staubli and Zweimüller, 2013; Vestad, 2013; Cribb et al, 2016; Rabaté and Rochut, 2020). Outside Europe, the effect of pension age reform has been studied in the US (Mastrobuoni, 2009; Blau and Goldstein, 2010; Behaghel and Blau, 2012) and in Australia (Atalay and Barrett, 2015). The considerable variation between the findings of these studies about the effects of the reforms warrants further research on this topic

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Conclusion