Memorandum,
Oslo University, Department of Economics

Abstract: This paper simulates a set of proposed policies from the Norwegian pension reform within a structural dynamic model of health and retirement estimated on the Norwegian labour market data. The paper focuses on the two main elements of the reform, namely the new pension entitlement accrual rules linking benefits more closely to earnings and the new pension benefit drawing rules designed to eliminate the incentives distortions with respect to the time of retirement. The effects of these proposals are investigated in terms of labour market outcomes, social welfare and income distribution. It is shown that while the proposed pension reform succeeds in urging the older workers to postpone their retirement and induces an increase in total social welfare, individuals in good health who retire early experience a negative change in their discounted utility. In addition, an increase in social welfare is accompanied with an increase in income inequality.

Keywords: Pension reform; incentive neutral retirement; pension entitlement accrual rules; labour market outcomes; social welfare; income inequality; structural dynamic model; health; retirement

JEL-codes: C61; H55; J26

66 pages, July 1, 2008

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Memo-14-2008.pdf  

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