Pension Reform with Employment during Retirement Simulation Analysis of a Life Cycle Model for Germany

Abstract: In many countries, the ratio of pension entitlement to earnings is declining due to demographic developments. In 2017, the German government introduced a pension reform which allows workers to accumulate more pension capital through continued employment during retirement. I develop a partial equilibrium overlapping generations model in which agents choose how much to consume, save, and whether or not to retire. Agents are heterogeneous in their education and dis-utility of labor, which may serve as a proxy for deteriorating health. I find that the reform is welfare enhancing for both types and it creates large incentives for workers to remain employed longer. The model predicts an increase in the effective average retirement age of 2.7 years, from 64.0 to 66.7.