Working Paper: CEPR ID: DP16380
Authors: Fabian Kindermann; Veronika Pueschel
Abstract: In this paper, we challenge the conventional idea that an increase in the progressivity of old-age pensions unanimously distorts the labor supply decision of households. So far, the literature has argued that higher pension progressivity leads to more redistribution and insurance provision on the one hand, but increases implicit taxes and therefore distorts labor supply choices on the other. In contrast, we show that a well-designed reform of the pension system has the potential to encourage labor force participation. We propose a progressive pension component linked to the employment decision of households, which implicitly subsidizes employment of the productivity poor. A simulation analysis in a quantitative stochastic overlapping generations model with productivity and longevity risk indicates that this positive employment effect can be sizable and welfare enhancing.
Keywords: progressive pensions; labor supply; employment incentives
JEL Codes: D15; H31; H55; J21; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the progressivity of pensions (H55) | Encouraging labor force participation (J49) |
| Progressive pension system (H55) | Encouraging labor force participation (J49) |
| Employment-linked pension component (H55) | Employment rate for productivity-poor individuals (E24) |
| Increased progressivity (H29) | Distortion of labor supply at the intensive margin (J29) |
| Controlling for individual productivity and life expectancy (J17) | Understanding the true impact of pension reforms (H55) |