The effect of pension reforms on old-age income inequality

Abstract

Many OECD countries are raising the normal retirement age (NRA), thereby, making early retirement more costly. Whereas such reforms incentivize individuals to work longer, labor market frictions might partly undermine intended behavioral responses. Employing administrative data of West German men, I estimate a dynamic discrete choice model of work, unemployment and retirement allowing for labor market frictions. Involuntary job losses constrain individual choice sets to differing degrees along sociodemographic characteristics. A policy-simulation suggests that the behavioral response to an increase in the NRA from 65 to 67 is moderate, with an average delay of employment exits of only 0.7 years. Widespread reform effectiveness is hampered by the heterogeneous availability of jobs. Concerning the resulting pension benefits, poverty-vulnerable groups are hit hardest: Individuals with low education and blue collar employees suffer disproportionally. Old-age income inequality increases.