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Work Less but Stay Longer: Mature Worker Response to a Flexibility Reform

Mature workers

Erik Hernaes, Zhiyang Jia, John Piggott and Trond Christian Vigtel

Abstract: Reducing the eligibility age for pension benefits is considered by many as a policy that will discourage labor supply by mature workers. This paper analyzes a recent Norwegian pension reform which effectively lowered the eligibility age of retirement from 67 to 62 for a group of workers. For the individuals we study, the expected present value of benefits was held constant by introducing flexible claiming and actuarially adjusting the periodic pension payment. This neutralized the income effect of decreasing the access age, while the absence of any earnings test ensured constant present value of the pension, independent of the age when it is claimed. This provides us with a unique opportunity to study the isolated impact of increased flexibility. This paper employs a particular difference-in-difference approach, which allows us to study the effect on the distribution of labor supply behavior (represented by earnings) instead of just the mean. As expected, we find that on average workers reduced their earnings and working hours. However, this initial negative effect is partially offset by an increase in labor force participation rate later at age 64 and 65. An increase in labor force participation after age 65 could well give a positive effect on earnings among elderly from age 62. Our findings thus suggest that increased flexibility could potentially serve as a policy aimed at increasing the labor supply of older workers through promoting gradual exit from the labor force.

Keywords: Retirement; Pension; Flexibility

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