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VAM-Velferd, arbeid og migrasjon

Inequality and social sustainability of the Norwegian pension system after the reform

Alternative title: Ulikhet og sosial bærekraft i det norske pensjonssystemet etter pensjonsreformen

Awarded: NOK 4.0 mill.

Efficiency and equity The Norwegian 2011 pension reform repealed the earnings test in the private sector and introduced flexible and actuarially neutral claiming of public pension, thereby increasing work incentives and prolonging working life. A new study focusses on distribution and equity (Andersen, Markussen og Røed, 2021: Pension Reform and the Efficiency-Equity Trade-Off: Impacts of Removing an Early Retirement Subsidy, doi: https://doi.org/10.1016/j.labeco.2021.102050). Over the age span 62 to 67, the study shows similar responses, measured by labour force participation and hours worked, over earnings deciles. These are based on average lifetime income up to age 60. Only those who chose to retire received the pre-reform AFP, whereas all who are covered receive the post reform AFP. Total cost has not been increased correspondingly. The analysis shows that the fraction of definite winners (those who would have continued working also under the former rules) is higher in the higher earnings group and the fraction of losers (those would have retired regardless of the rules) is higher in the low-income group. This will increase the lifetime earnings inequality. To look at the whole retirement period, we simulate earnings trajectories under the pre- and post-reform rules using expected longevity (by occupation). The pure impact of the rules change is to increase income for about the half and lower income for the other half. On the other hand, more people will work and more than 90 % will have higher earnings under the new regime. Still, the Gini coefficient increases somewhat and the reform gives a choice between equity and efficiency. The reform brings the private return to work more in line with the social return, and the reform therefore gives a welfare gain. On the other hand, the inequality increases, raising the issue of weighing equity and efficiency. One way to reduce the impact on inequality would be to let a part of the pension last for a shorter period. Since those with high income both accrue more pension entitlements and live longer, this would transfer income from those with high income to those with low income over the retirement period. Correlation between longevity and income has not been taken into account, and the impact on inequality is therefore underestimated. Preferences and barriers Although significant responses to work incentives and flexible pension claiming are already observed, there may still be barriers to flexible adjustment. We conducted a survey to study preferences and perceived barriers. In-depth interviews were conducted with 12 older workers in the manufacturing industry (Midtsundstad, T., 2018 Seniorer i industrien arbeidslivets slitere. FAFO-rapport 2018:34). None of the respondents envisaged working until 67. Many preferred to listen to the advice of peers and experts on pension claiming, rather than trying to understand the rules and chose on such a basis. Many did not have the option of reducing working hours. This was the background for a survey conducted early 2021. The survey confirms later labour market exit after the reform, in particular among non-employees and often combined with claiming pension. People mostly stayed on in their permanent job, temporary jobs do not start to be common until after age 70. Most retirees left because of health issues; a stressful job, physically or mentally; or because they wanted more leisure and more energy for activities and work. Few did reduce hours, maybe because they wanted to keep the full wage, or because they did not want to reorganize their tasks at work. About one in seven reported closure or reduction of the work force and important factors for their retirement. An important motive for claiming pensions early is to preserve any remaining pension for descendants, in the case of early death. Respondents also wanted higher income for a period late in the careers or just after. Few gave as motive for delayed retirement that they wanted higher pension later. In general, people appear to be myopic, and value immediate income higher than future income. Pension claiming and saving A majority claimed the flexible pension once they were eligible, indicating potentially future sharp drops in disposable income when labour earnings cease. We have constructed approximate liquid savings data. Preliminary results show that savings, measured as a fraction of net income, including pensions claimed, is fairly constant before and after early claiming became an option. This results in higher savings, but far less that what would correspond to smoothing pension or income over the remaining life time (Hernæs, E., 2022: Flexible Pensions, Claiming and Saving. Unpublished manuscript, the Frisch Centre, available on request.) The study will be extended to include real estate investment and, if possible, transfers to the next generation. https://www.frisch.uio.no/ https://www.fafo.no/

Vi venter at resultatene vil være en del av underlaget både i den kommende diskusjonen om pensjonsreformen og eventuelle endre i pensjonene.

The proposed project will look at both the experiences made and trends that can be detected so far, with the pension reform. We will start by comparing earnings and pension claiming trajectories over the age span 62-69, focussing on cohorts with the trajectory either before or after the reform. The differences will be broken down into the pure effects of rules and behavioural responses, and we will study variation between groups by education, industry and other characteristics will be studied. Pension claiming and saving will be analyzed to look signs of potential consumption shocks. Too look for a better understanding of preferencs and financial understanding, we will try structural modelling with individual variation in discount rates. Focus will be on the impact of the reform on distribution and inequality. The long term effect will be assessed by the trends detected. We will conduct in-depth interviews among a group of retirees about motives and options. Based on experiences from the interviews we will design a survey among a representative sample of recent retirees and employees aged 62 years and older. Part of the sample and questionnaire will be structured to be comparable to a previous survey, to analyse the impact of preferences and barriers on the responses we have observed. The results from the register based analyses and the survey will be seen in combination, to obtain a deeper understanding of the respones observed and the impact of the reform. Finally, the results will be summed to assess whether can be seen to be in compliance with the stated goals of the reform.

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VAM-Velferd, arbeid og migrasjon