On the Political Feasibility of Increasing the Legal Retirement Age - - PowerPoint PPT Presentation

On the Political Feasibility of Increasing the Legal Retirement Age

Benjamin Bittschi and Berthold U. Wigger CEPS EconPol lunch debate – 02 October 2019

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Introduction

Motivation

◮ Population aging due to an increase in life expectancy is a trend in virtually all

developed economies

◮ Trend as such hardly alarming ◮ However, pressure on old-age security

OECD average: Expected years in retirement, by sex Time 1970 1980 1990 2000 2010 2016 Men 10,6 12,6 14,8 16,9 18,2 18,1 Women 14,6 17,4 20,0 22,6 22,8 22,5 Source: OECD

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Introduction

Motivation

Basically, three strategies have been pursued to stabilize the financing of public pensions:

• 1. Increasing revenue by raising contribution rates, taxes or debt
• 2. Cutting benefits
• 3. Postponing retirement

◮ First strategy, widely used but given the current economic environment not

sustainable anymore

◮ Second strategy, becomes the more unpopular the older the population grows ◮ ... third strategy remains

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Introduction

Motivation

13.00 13.50 14.00 Population over 65 in % 50 55 60 65 Replacement rate 60 61 62 63 64 65 Average legal retirement age 1980 1981 1982 1983 1984 1985 YEAR

France

17.00 19.00 21.00 Population over 65 in % 39 40 41 42 43 Replacement rate 62.56363.56464.565 Average legal retirement age 2000 2002 2004 2006 2008 2010 YEAR

Germany

15.00 16.00 17.00 18.00 Population over 65 in % 58 60 62 64 Replacement rate 61.5 63.5 Average legal retirement age 1990 1995 2000 2005 2010 YEAR

Austria

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Introduction

Contribution

◮ Simple politico-economic model with legal retirement age as outcome of

majority voting demonstrates that

◮ retirees prefer a higher legal retirement age compared to workers ◮ Retirees who have just retired prefer the highest legal retirement age ◮ increase in life expectancy leads to higher legal retirement age ◮ increase in replacement rate leads to lower legal retirement age

◮ Empirical validation of the theoretical predictions

◮ Individual reform preferences using German micro data ◮ Comparatively using OECD data 5/9

Introduction

Results

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Introduction

Results – FRD

.1 .2 .3 .4 .5

• 40
• 20

20 Sample average within bin Polynomial fit of order 1 .1 .2 .3 .4 .5

• 40
• 20

20 Sample average within bin Polynomial fit of order 2

Discontinuity effect of pension

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Introduction

Results – Fixed effects regression

(1) (2) (3) (4) (5) (6) Legal ret. age Average Legal ret. age Average Legal ret. age Women Legal ret. age Women Legal ret. age Men Legal ret. age Men Replacement rate −0.073∗∗∗ −0.050∗∗ −0.083∗∗∗ −0.065∗∗ −0.063∗∗ −0.035∗ (0.025) (0.020) (0.026) (0.023) (0.025) (0.020) Population over 65 0.352∗∗∗ 0.364∗∗ 0.511∗∗∗ 0.543∗∗∗ 0.194∗ 0.185 (0.092) (0.130) (0.092) (0.121) (0.112) (0.157) Life expectancy at age 65 0.243 0.152 0.334 (0.507) (0.677) (0.444) GDP per capita −3.594 −3.205 −3.983∗ (2.084) (2.174) (2.072) GDP growth 0.017 −0.005 0.038 (0.038) (0.045) (0.039) Government support −0.007 −0.003 −0.011 (0.013) (0.013) (0.013) Country FE YES YES YES YES YES YES Time FE NO YES NO YES NO YES Observations 713 700 713 700 713 700 Countries 20 20 20 20 20 20

• Adj. R2

0.247 0.305 0.335 0.359 0.122 0.217 Standard errors (clustered at the country level) in parentheses; * p < 0.10, ** p < 0.05, *** p < 0.01 8/9

Conclusion

Conclusion

◮ Retirees compared to workers have a higher probability to vote for an increase

in legal retirement age (micro data for Germany)

◮ 1 percentage point increase in share of the elderly increases legal retirement

age by 0.3 to 0.5 years (cross country data)

◮ 10 percentage point increase in replacement rate reduces legal retirement age

by 0.5 to 3 years (cross country data)

◮ Policy Conclusion (i): If policy manages to limit generosity of pension system,

increase in legal retirement age as response to aging can be expected to find political support

◮ Policy Conclusion (ii): The just retired support an increasing retirement age

most → implications for pension reform timing, as the expected retirement of the baby boomer generation will be favorable to increase the retirement age.

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