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

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  • Andersen, Asbjørn Goul

    (Ragnar Frisch Centre for Economic Research)

  • Markussen, Simen

    (Ragnar Frisch Centre for Economic Research)

  • Røed, Knut

    (Ragnar Frisch Centre for Economic Research)

Abstract

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. Causal effects are identified based on a reform of the Norwegian early retirement program, which entailed that adjacent birth cohorts were exposed to completely different work incentives from age 62. The reform removed a strict retirement earnings test such that pension wealth was redistributed from early to late retirees. Given the pre-existing employment and earnings patterns, this implied a considerable rise in old-age income inequality. In principle, this could have been offset by changes in the labor supply. We estimate that the reform triggered a 42% increase in hours worked during the ages covered by early retirement options. However, as the labor supply responses were of similar magnitudes across the earnings distribution, they did little to offset the rise in inequality. As measured by the Gini coefficient, inequality in overall old-age income rose by approximately 0.03 (17%).

Suggested Citation

  • Andersen, Asbjørn Goul & Markussen, Simen & Røed, Knut, 2020. "Pension Reform and the Efficiency-Equity Trade-Off: Impacts of Removing an Early Retirement Subsidy," IZA Discussion Papers 12918, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12918
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    Cited by:

    1. Todd Morris, 2022. "The unequal burden of retirement reform: Evidence from Australia," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 592-619, April.
    2. Erik Hernæs & Simen Markussen & John Piggott & Knut Røed, 2024. "The impact of pension reform on employment, retirement, and disability insurance claims," Journal of Population Economics, Springer;European Society for Population Economics, vol. 37(4), pages 1-27, December.
    3. Giesecke, Matthias & Jäger, Philipp, 2021. "Pension incentives and labor supply: Evidence from the introduction of universal old-age assistance in the UK," Journal of Public Economics, Elsevier, vol. 203(C).
    4. Ali Zeytoon-Nejad, 2024. "The Big Tradeoff averted: five avenues to promote efficiency and equality simultaneously," International Economics and Economic Policy, Springer, vol. 21(4), pages 933-968, October.
    5. Hernæs, Erik & Kornstad, Tom & Markussen, Simen & Røed, Knut, 2023. "Ageing and labor productivity," Labour Economics, Elsevier, vol. 82(C).
    6. Baurin, Arno & Hindriks, Jean, 2023. "Intergenerational consequences of gradual pension reforms," European Journal of Political Economy, Elsevier, vol. 78(C).
    7. Baurin, Arno & Hindriks, Jean, 2022. "Intergenerational consequences of pension reforms: Tension between democracy and equality," LIDAM Discussion Papers CORE 2022008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    Keywords

    pension reform; inequality; labor supply;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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