Is it worth raising the normal retirement age? A new model to estimate the employment effects

Abstract

Pension reforms, that raise the normal retirement ages, are crucial yet controversial in ageing developed countries. While cross-country studies confirm positive significant effects, their estimated effects are modest compared to those from country-specific studies using micro data. This study attempts to reconcile these differences by introducing greater heterogeneity into the cross-country approach. Starting from a standard cross-country panel error correction model, several empirical innovations are introduced to better capture the influence of the demographic composition of countries, the possibility of retiring at an earlier age, and the importance of private pension funds and early exit pathways. These changes result in larger and more heterogeneous predicted effects of changes in the normal retirement ages on the older-age employment rate and average age of labour market exit across countries. The proposed model, allows for simulations on the effects of pension policy reforms.