Pension reforms, liquidity constraints and labour supply responses

Today, nearly all industrialized countries are ageing. An increasing number of individuals are becoming eligible for retirement, and the maturing of the pensions system gives increasing pension levels. With the present Norwegian pension system,which is a pay-as-you-go pension benefit system, an increasing burden of work and tax payments will have to be born by a declining number of individuals in the work force over the coming decades.

However, pension reforms have been proposed by the Norwegian government, with the intention to induce more people to postpone their retirement age. The reforms, if implemented, will give the individuals an incentive to postpone retirement. The unions have argued against part of the reforms and pointed to the fact that the reforms would excessively punish people who retire early compared to what happens under the current pension regime. In Norway, there is an early retirement scheme (AFP) that covers all employees in the public sector and a majority of employees in the private sector. The lowest retirement age is 62. If one decides to retire early, he or she is not punished in terms of lower annual future pension benefits.

To assess the labour market implication of pension reforms, one needs to know how potential retirees respond to the labour supply incentives present in the pension reforms and to changes that reform the pension system further, which implies that if one retires at the earliest possible age, annual pensions will be lower than if the retirement age is postponed. This is what this paper tries to answer.