The Effects of Pension Reforms on the Labor Market

by Matteo Paradisi, Harvard University

For the past three decades, most OECD countries have passed pension reforms aimed at ensuring the long-term financial sustainability of their social security system.  A recurrent feature has been the adoption of measures to prolong the working life, such as increases in the statutory age to claim retirement benefits and incentives for later retirement that induces firms to retain older workers who would otherwise retire.  Similar trends are observed in the U.S., where the retirement age will gradually adjust from the age of 66 to 67 in the next few years; the Congressional Budget Office will list an increase in the full retirement age to 70 among the options to reduce the budget deficit between 2017 and 2026.  This dissertation studies the labor market effects of changes in the retirement rules that tighten requirements to claim pensions.  With the presence of increasing firing costs with the workers’ age and the retirement patterns bunching at statutory retirement ages, such reforms unexpectedly prolong the relationship between the firm and the worker.  We evaluate the effect of the reform on firms’ decisions about the external and internal labor market.  We also document how the reform affects the careers of workers employed in firms where older employees are retained.  We focus on earnings in the aftermath of the reform, the probability of being employed, and years of accumulated work experience.

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