Discussion paper

DP16420 Retirement Consumption and Pension Design

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.


Landais, C, J Kolsrud, D Reck and J Spinnewijn (2021), ‘DP16420 Retirement Consumption and Pension Design‘, CEPR Discussion Paper No. 16420. CEPR Press, Paris & London. https://cepr.org/publications/dp16420