Pension Reform and Labor Supply: Flexibility vs. Prescription
We exploit a comprehensive restructuring of the early retirement system in Norway in 2011 to examine labor supply responses to alternative pension reform strategies relying on improved work incentives (flexibility) or increased access ages (prescription), respectively. We find that increasing the returns to work is a powerful policy tool: The removal of the earnings test at age 63 led to an immediate increase in average annual labor earnings among the affected mature workers by around $14,700 (NOK 90,000). The implied uncompensated labor earnings elasticity (the percentage change in average gross earnings relative to the percentage change in average work-incentives) is around 0.25. NON-TECHNICAL SUMMARY Demographic imperatives are triggering pension reforms, especially social security reform, in many countries. These reforms typically have the twin aims of increasing mature labor force participation, and reducing the fiscal cost of social security. Reform initiatives often rely on prescription to achieve these aims, usually by increasing the age at which social security becomes available. But this is a fairly blunt approach: the heterogeneity of personal circumstances among mature aged workers leads to difficulties for many individuals, and often leads to increases in disability benefit payouts. An alternative approach, not tried very often, is to provide undistorted flexibility to mature workers: set up actuarially fair benefits, so that working longer is appropriately rewarded with higher pensions, and then allow flexibility in drawdown and labor force participation above some minimum age, so that workers may adjust their pension drawdown profile and work patterns without any impediment. While the 2011 Norwegian reform embraced the flexibility approach, the complexity of the pension system and the reform imply that groups are affected in different ways, thus allowing comparison of flexibility and prescription. We find that so far, the flexibility approach has been successful in delivering strong labor force participation outcomes. Prescription appears not to add much in terms of labor force participation, while giving increased disability inflow.
Hernæs, E., S. Markussen, J. Piggott and K. Røed
H55, J22, J26
early retirement, labor supply, pension reform, program evaluation