The Effect of Retirement Age on Labor Productivity: A Macroeconomic Approach

Abstract

In developed economies, the population is aging and social security expenditure is projected to increase. This paper examines the effect of increasing the retirement age at which people start receiving pension on human capital investment and labor productivity. I build a quantitative overlapping-generations model with endogenous human capital investment in the Ben-Porath style. I find that increasing the retirement age increases human capital investment and labor productivity. People work for longer years until the new retirement age, and thus they invest more in human capital while young. Increasing the retirement age by 2 years leads to a welfare improvement of 1.2%.