Reforming retirement age in DB and DC pension systems in an aging OLG economy with heterogenous agents

Joanna Tyrowicz,Marcin Bielecki,Krzysztof Makarski

doi:10.1186/s40173-016-0067-8

Joanna Tyrowicz, Marcin Bielecki + Show 1 more

Open Access

https://doi.org/10.1186/s40173-016-0067-8

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Abstract

AbstractWe analyze the effects of increasing the retirement age in two economies with overlapping generations and within cohort ex ante heterogeneity. The first economy has a defined benefit system, and the second economy is in transition from a defined benefit to a defined contribution. We find that if increase in the retirement age is phased in a way that allows agents to adjust, welfare is not reduced and welfare effects have a similar magnitude and between-cohort distribution in both types of the pension systems.

Highlights

In the policy debate on the consequences of longevity, the systemic reform of the pension system and the parametric reform are typically viewed as policy alternatives
We find that whether or not the systemic reform is introduced, the welfare effects from increasing the minimum eligibility retirement age are of a similar magnitude
7 Conclusions It is often argued that if a defined benefit (DB) system is replaced with a defined contribution (DC) system there is no need to raise the retirement age

Summary

Introduction

In the policy debate on the consequences of longevity, the systemic reform of the pension system and the parametric reform are typically viewed as policy alternatives (see Auerbach et al 1989; Boersch-Supan and Ludwig 2010; Fehr 2000; Hviding and Marette 1998). Our results hold irrespectively of preferences, i.e., welfare effects are of the same sign as the representative agent even for agents with a high preference for leisure and low patience This makes the parametric reform of increasing the retirement age a natural complementarity in the transition phase, because higher pension benefits due to a longer working period and shorter collection period partially cushion the decrease in pensions due to the systemic reform. In a comparative study for Germany, France, and Italy, Boersch-Supan and Ludwig (2010) find positive effects of increased labor supply and show compelling evidence that increasing the retirement age may be an effective way to achieve that goal These papers consistently find welfare improvement with delaying the labor market exits of older cohorts, but sometimes, the gains are not universal and depend on the type of adjustment in the taxes and pension systems. This last contribution seems relevant from a policy perspective

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