Thought du Jour

Ukraine recently increased its nearly universal, minimum pensions by 250%, to a level above the legal minimum wage, without any means or retirement testing. This eliminated pension-aged poverty, but allowed many elderly workers to stop working. The vast majority (88 percent) of pensioners currently receive a minimum pension, a reflection of low wages of the Soviet era. Economist Alexander Danzer, who teaches at Royal Holloway Colege (University of London), uses this “natural experiment” to measure the disincentive effects of pensions on work. PensionReforms discusses his findings, and provides a link to the full paper.

“As old-age pensions are neither means-tested nor conditioned on retirement, the rise in benefit levels will induce a pure income effect, which enables an individual to afford more leisure.” This implies that the pensions are not taxed as income, so would not place a worker in a higher tax bracket. The author finds measured “strong disincentive effects on the labor supply decision of elderly people”. More precisely, the threefold increase in the minimum pension leads to an increase of 37-47 percent in male retirees at age 60, and a 30-39 percent increase in female retirees at age 55. The author chooses to emphasise this finding, warning: “The policy goal to combat poverty via pension increases might become ineffective and fiscally extremely costly, when the pension aged withdraw their manpower from the labor market.”

PensionReforms notes that it is important to keep in mind that few workers in the Ukraine were retiring at the statutory age (55 for women and 60 for men) prior to pension reform, so the denominators of these 30-47 percent figures are not very large. The effect of the pension increase on the size of the labour force is much smaller, simply because the denominator is somewhat larger. In the words of the author “The overall effect of the pension increase can be expected to amount to roughly 413,000 persons or 2.4 percent of the pre-reform labor force.” Moreover, this reduction in the labour force was predominantly the result of the retirement of women and service sector workers with little education, so the effects on the economy would be even smaller. PensionReforms thinks that this seems to be a price worth paying to eliminate poverty in old age. That price would be lower still if the pension age were increased to, say, 65 years from the current 55/60 years.

“Retirement Responses to a Generous Pension Reform”, Pension Reforms, 30 August 2010.

This entry was posted on Sunday, September 5th, 2010 at 07:19 and is filed under Pensions. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.