![]() ![]() ![]() We analyse rich data on the characteristics of retirees at various ages to help us understand how these factors might change our evaluation of pension reforms. Other factors may matter, including health and life expectancy which directly affect the redistributive weights one wants to assign to different retirees as well. Naturally, the level of consumption might not be the sole determinant of marginal utility. In this specification, only year and age fixed effects are included. Individuals who retire at 65 are the reference category. Notes: The figure reports estimates of our comparison of consumption levels across all retirement ages. We confirm the same overall patterns when studying surveyed consumption in other European countries and the US.įigure 1 Consumption level by retirement age Individuals retiring between 60 and 63 years have similar or higher consumption on average compared to those retiring near the normal retirement age of 65. Notably, while the overall consumption gradient between retirees at ages 55 to 70 is large and positive, we also document a notable non-monotonicity among those retiring at ages 60 to 65. This suggests that rewarding later retirement by giving later retirees more generous pensions redistributes from low-consumption to high-consumption households. The overall gradient of consumption with respect to the retirement age is steep, with late retirees enjoying over 20% more consumption than premature retirees. Figure 1 shows how consumption at age 68 varies with retirement ages, comparing each retirement age group to those retiring at 65 (which we consider as a benchmark for a normal retirement age). So, we start by simply examining how overall consumption post-retirement varies across workers who retire at different ages. Mapping consumption data to marginal utilities requires some assumptions, so we employ a variety of ways of looking at consumption and supplement consumption data with data on wealth, health, and life expectancy.Īccording to economic theory, one key determinant of the marginal utility of consumption is the level of consumption itself: the higher the latter, the lower the former. If, all else equal, early retirees have much higher marginal utility of consumption than late retirees, for instance, this suggests that a steeper profile has a large welfare cost.īut do early retirees actually have higher marginal utilities of consumption than late retirees, and if so, just how much higher? To shed light on this question, we use administrative data from Sweden and registry-based measures of household consumption (Kolsrud et al. ![]() In our paper, we show that the size of this welfare cost depends on the marginal utility of consumption of workers retiring at different ages. Specifically, these reforms redistribute resources away from people who value them relatively more (early retirees) and toward those who value the benefits relatively less (late retirees). If people who retire earlier value pension benefits more than those retiring later do, then incentivising later retirements via the pension system entails welfare costs. The cost of a steeper profileĪ key quantity to evaluate the cost of a steeper benefit profile is the value that individuals retiring at different points in life attach to the pension benefit as a means of smoothing consumption when retired. How rapidly should pension benefits rise for workers who retire later in life? Our analysis enriches the existing literature, which, in contrast, mainly revolves around questions of the overall generosity of pensions, whether they are funded or pay-as-you-go, and the response of retirement timing to pension incentives. The policy question we study essentially concerns the optimal steepness of the pension benefits profile as a function of the retirement age. 2021), we propose a framework to analyse the welfare effects of pension reforms that incentivise later retirement. Such incentives have desirable fiscal effects – workers who retire later pay more tax – but their overall welfare effects are still poorly understood. That is, in addition to reducing the generosity of public pensions generally, reforms in many countries have introduced or strengthened incentives favouring longer working lives. Gruber and Wise 1999, OECD 2019, Barr and Diamond 2009) in order to restore fiscal sustainability in light of ageing populations. ![]() A common theme of these reforms has been to induce workers to retire later (e.g. Many countries have undertaken large reforms to their public pension systems over the past two decades, and more seem likely to follow suit in the near future. ![]()
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