Retirement Consumption and Pension Design

The paper presented in this Mannheim Applied Seminar 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 administraive data in Sweden, the authors 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. They 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 the authors document a striking non-monotonicity in consuption levels. They find similar patterns in consumption data from other countries, including the non-monotonicity, suggesting our findings are not unique to Sweden.