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THE EFFECT OF THE PENSION REFORM ON RETIREMENT AGE AND INCOME DISTRIBUTION - ESTIMATES FROM A DYNAMIC PROGRAMMING MODEL

THE EFFECT OF THE PENSION REFORM ON RETIREMENT AGE AND INCOME DISTRIBUTION - ESTIMATES FROM A DYNAMIC PROGRAMMING MODEL,Tuulia Hakola

THE EFFECT OF THE PENSION REFORM ON RETIREMENT AGE AND INCOME DISTRIBUTION - ESTIMATES FROM A DYNAMIC PROGRAMMING MODEL  
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Pension reforms have become acute because population ageing puts financial pressure on the public PAYG pension systems. Direct pension cuts are politically difficult, so it is easier to get through a pension r eform that attempts to increase the average reti rement age. In order to assess the extent of the reform that is needed, it is essential to estimate how much people will react to the reforms. Moreover, r eforms can also have an i mpact on the equity. This is naturally also of concern to the policy maker. In this paper we evaluate a major pension reform in Finland in 2005, and assess its impact on the labour market withdrawal age and pension benefit distribution. The reform is evaluated with a dynamic programming model that models the pe nsion and unemploymen t benefit rules and taxation in great detail. We match the model labour market shares to the real data prior the reform and simulate the labour market beha viour after the reform. We find t hat the pension reform increases the average labour market withdrawa l age by a bit more than a year. Most of this is done by limiting the early retirement options, even though also the higher i ncentives in the older age also ha ve an impact. The distribution of the pension benefits becomes more equal because the reform chan ged the way the benefits are calculated. Before the reform only the final wages in each employment contract mattered , whereas after the reform the benefits are based on the lifetime wages .
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