Retirement, pensions, and ageing

We study the effects of demographic shocks and changes in the pension system on the macroeconomic performance of an advanced small open economy facing a given world interest rate. We construct an overlapping-generations model which includes a realistic description of the mortality process. Individual agents choose their optimal retirement age, taking into account the time- and age profiles of wages, taxes, and the public pension system. The early retirement provision in most pension systems acts as a trap, inducing most workers to retire well before the normal retirement age. Simulations show that pension reform must be drastic for it to have any effects on the retirement behaviour of workers.

Keywords: Retirement; Pensions; Ageing; Demography; Gompertz-Makeham Law of mortality; Overlapping generations; Small open economy

JEL classification codes: E10; J26; H55; D91; F41; J11