Work less but stay longer — Mature worker responses to a flexibility reform

Abstract

Many consider that reducing the eligibility age for pension benefits will discourage labour supply among mature workers. This paper analyses a recent Norwegian pension reform that effectively lowered the eligibility age for retirement for some workers from 67 to 62, and we find that the above proposition might not be true. For these workers, the option of flexibly claiming from age 62 is introduced while the expected present value of benefits is held constant through actuarial adjustment of the periodic pension payments. This reform provides us with a unique opportunity to isolate the impact of increased flexibility on labour supply. We employ an event-study difference-in-difference approach to study the labour supply response (measured by number of weekly working hours as well as labour earnings) on the intensive and extensive margin. For those aged from 62 to 66, the reform leads to an increase in the labour supply at the extensive margin of 1.3 percentage points with a reduction in inflow to disability, and a decrease in the intensive margin of labour supply as measured by weekly working hours. In addition, a shift in the distribution of labour earnings further supports the finding that there is a decrease in the intensive margin of labour supply. Our findings thus suggest that increased pension flexibility could promote a gradual exit from the labour market, allowing for greater individual choice and positive welfare effects. This flexibility could also be an important component of broader pension reform.