Ruhr Economic Papers

Ruhr Economic Papers #844

Pension Incentives and Labor Supply: Evidence from the Introduction of Universal Old-Age Assistance in the UK

by Matthias Giesecke and Philipp Jäger

RWI, 04/2020, 61 S./p., 10 Euro, ISBN 978-3-86788-979-7 DOI: 10.4419/86788979

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Abstract

We study the labor supply effects and welfare implications of introducing a universal means-tested old-age assistance program in times of very limited social protection. We take advantage of a unique historical reform: The Old-Age Pension Act (OPA) of 1908, which, for the first time, provided pensions to older people in the UK. Using recently released full-count census data covering the entire population, we exploit variation at the newly created age-based eligibility threshold. Our results show a considerable and abrupt decline in labor force participation of 6.0 percentage points (13%) when older workers reach the eligibility age of 70. This sudden drop only occurs at the age cutoff and only after the OPA was implemented. Despite the considerable labor supply decline, the overall efficiency loss from the OPA was limited and most likely outweighed by equity gains.

JEL-Classification: D61, H21, H55, J14

Keywords: Old-age assistance; labor supply; retirement; regression discontinuity design; equity-efficiency trade-off

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