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Progressive Pensions as an Incentive for Labor Force Participation

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  • Püschel, Veronika
  • Kindermann, Fabian
Abstract
In this paper, we challenge the conventional idea that an increase in the progressivity of old-age pensions unanimously distorts the labor supply decision of households. So far, the literature has argued that higher pension progressivity leads to more redistribution and insurance provision on the one hand, but increases implicit taxes and therefore distorts labor supply choices on the other. In contrast, we show that a well-designed reform of the pension system has the potential to encourage labor force participation. We propose a progressive pension component linked to the employment decision of households, which implicitly subsidizes employment of the productivity poor. A simulation analysis in a quantitative stochastic overlapping generations model with productivity and longevity risk indicates that this positive employment effect can be sizable and welfare enhancing.
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Suggested Citation

  • Püschel, Veronika & Kindermann, Fabian, 2023. "Progressive Pensions as an Incentive for Labor Force Participation," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277643, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc23:277643
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    1. Werding, Martin & Runschke, Benedikt & Schwarz, Milena, 2024. "Alterungsschub und Rentenreform: Simulationen für GRV und Beamtenversorgung," Working Papers 01/2024, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    2. Gustafsson, Johan, 2024. "Favorable tax treatment of older workers in general equilibrium," Umeå Economic Studies 1023, Umeå University, Department of Economics.
    3. Simonovits, András, 2024. "A népességöregedés kihívásai és újraelosztás a nyugdíjrendszerben [Population aging and redistribution in a pension system]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 833-849.

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    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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