Forward-Looking Labor Supply Responses to Changes in Pension Wealth: Evidence from Germany

We provide new evidence of forward-looking labor supply responses to changes in pension wealth.  We exploit a 2014 German reform that increased pension wealth for mothers by an average of 4.4 percent per child born before January 1992.  Using administrative data on the universe of working histories, we implement a difference-in-differences design comparing women who had their first child before versus after January 1, 1992.  We document significant reductions in labor earnings, driven by intensive margin responses.  Our estimates imply that, on average, an extra euro of pension wealth in a given period reduces unconditional labor earnings by 54 cents.

The paper found that:

• Changes in the generosity of public pension systems can affect labor supply behavior far from retirement.
• Reductions in labor earnings, driven by intensive margin responses, imply that, on average, an extra euro of pension wealth in a given period reduces unconditional labor earnings by about 54 cents.
• Responses are larger among women with lower predicted returns to tenure and higher pre-reform pension wealth and women whose partners are closer to the statutory retirement age.

The policy implications of the findings are:

• Individuals are forward looking and respond to pension changes far before retirement age.
• Spillovers within the household can amplify responses to individual incentives.
• This implies that pension reforms can have aggregate labor supply effects well beyond the direct impact on individuals on the verge of retirement.