Discussion Paper Details

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Title: Retirement Consumption and Pension Design

Author(s): Jonas Kolsrud, Camille Landais, Daniel Reck and Johannes Spinnewijn

Publication Date: August 2021


Programme Area(s): Labour Economics and Public Economics

Abstract: This paper develops and implements a framework that leverages consumption data to evaluate the welfare effects of pension reforms. Several countries have reformed their pension profiles to incentivize later retirement. Using administrative data in Sweden, we find that such pension reforms entail substantial consumption smoothing costs. On average, individuals retiring later have higher consumption levels than those retiring earlier, implying that recent pension reforms redistributed from low- to high-consumption households. We show that the differences in retirement consumption are mostly driven by differential changes in consumption around retirement, and also that the marginal propensities to consume are the lowest for late retirees. Accounting for selection on health and life expectancy further increases the redistributive cost of recent reforms. The cost of incentivizing later retirement is, however, lowest between the early and normal retirement age, where we document a striking non-monotonicity in consumption levels. We find similar patterns in consumption data from other countries, including the nonmonotonicity, suggesting our findings are not unique to Sweden.

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Bibliographic Reference

Kolsrud, J, Landais, C, Reck, D and Spinnewijn, J. 2021. 'Retirement Consumption and Pension Design'. London, Centre for Economic Policy Research.