Pension Reform and the Efficiency-Equity Trade-Off Impacts of Removing an Early Retirement Subsidy

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Andersen, Asbjørn Goul, Simen Markussen, Knut Røed




Labour Economics

Vol 72, 102050


We provide empirical evidence that the removal of work disincentives embedded in retirement earnings tests can increase old-age labor supply considerably, but it does so at the cost of more income inequality. To identify causal effects, we exploit a reform of the Norwegian early retirement program, which entailed that adjacent birth cohorts faced completely different work incentives from the age of 62. The reform removed a strict retirement earnings test such that pension wealth was redistributed from early to late retirees. Given pre-existing employment and earnings patterns, this implied a considerable rise in old-age income inequality. In theory, this direct increase in inequality could be either amplified or offset by changes in labor supply. We estimate that the reform triggered a 42% increase in average hours worked during the period covered by early retirement options; however, as labor supply responses were of similar magnitudes across the earnings distribution, they did little to modify the rise in inequality. As measured by the Gini coefficient, inequality in overall old-age income rose by approximately 0.03 (21%).




Pension reforminequalitylabor supply


Oppdragsgiver: Norges Forskningsråd
Oppdragsgivers prosjektnr.: 270875
Frisch prosjekt: 1673 - Inequality and social sustainability of the Norwegian pensjon system after the reform