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How Mandatory Pensions Affect Labor Supply Decisions and Human Capital Accumulation? Options to Bridge the Gap between Economic Theory and Policy Analysis

By Andras Bodor, David Robalino and Michal Rutkowski


Mandatory pension systems can have a negative impact on individual savings and labor supply decisions. In particular, defined benefit pension schemes that are not actuarially fair, can create incentives for early retirement, and therefore, reduce labor supply and the stock of human capital. After a review of frequently applied approaches to assess the incentives generated by a pension system, the paper develops an indicator to predict the age-specific retirement probabilities induced by a particular pension system given heterogeneous individual preferences. The paper then describes how this indicator could be used to project the size of the labor force by gender, age and skill level, and correspondingly, the dynamics of human capital accumulation. Finally, the paper develops a set of life-cycle income measures to assess how the pension system affects decisions regarding the supply of labor in the public and private sectors. The methods are illustrated in the case of cycle models, labor supply, human capital, retirement policies, job and occupational mobility

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