Is raising the normal retirement age a good policy? A new OECD model sheds light on employment effects

By Hermes Morgavi, OECD Economics Department

In many developed and ageing countries, pension reforms are crucial yet often controversial. One significant reform, frequently debated, is raising the normal retirement age —the age at which workers can claim their full pension benefits. As governments face the dual pressures of ageing populations and growing fiscal burdens, understanding the effects of such policies on employment is essential.

Morgavi (2024) introduced a new model that explores these effects in detail, addressing key questions: Is raising the normal retirement age worth it? How does it impact employment, particularly for older workers?

A new model for complex realities

While most cross-country empirical studies agree that raising the normal retirement age increases older-age employment, the scale of these effects often seems underwhelming—especially when compared to more detailed, single-country studies. This new OECD model seeks to bridge this gap by accounting for country-specific factors such as demographics, pension systems, and early retirement pathways.

Key findings: More than just small gains

The model introduces four major innovations:

1. Demographic sensitivity: Incorporating population structure and retirement patterns improves accuracy, predicting stronger employment effects in countries with lower retirement ages.
2. Retirement ages: Distinguishing between minimum and normal retirement ages allows for more precise simulations. Countries with large gaps between these ages could see substantial gains in employment rates by narrowing the gap.
3. Private pension systems: In countries where private pensions play a significant role, workers are less sensitive to changes in the public normal retirement age. The model highlights the importance of considering these systems when designing policy.
4. Early exit pathways: Many countries offer alternatives to early retirement through disability or unemployment benefits. These alternative early exit pathways dilute the effect of raising the normal retirement age. The model quantifies these undermining effects to give policymakers a clearer idea of the potential impact of policy changes.

A more worthwhile reform than expected

The model predicts that raising the normal retirement age can lead to much larger employment effects than predicted by previous cross-country macro models and closer to empirical research using microdata from individual countries. For example, a one-year increase in the normal retirement age is projected to raise the employment rate of those aged 55-74 by 1.5 to 2.3 percentage points, depending on the country. This is a significant improvement over earlier estimates from traditional models. Countries with the lowest employment rates, like Greece and France, stand to gain the most.

Figure 1. Model innovations give larger employment effects from raising the retirement age

Range of effects on employment rate of people aged 55-74, from raising the normal retirement age

Note: The graph compares the long-term effect on the old age employment rate and on the average age of labour market exit of a raise of the normal retirement age by 1 year among the models expressed in percentage points. On the x-axis, for each model, the main innovation introduced with respect to the previous model is shown. For the models including the effects of minimum retirement age and of the pipeline effects, these are also assumed to move by 1 year. The red horizontal marks show the median of the distribution of the effects among the countries in the sample; the blue boxes show the distance between the fifth and the ninety-fifth percentile; and the whiskers show the minimum and the maximum values. The effects are calculated using the data for year 2020 or latest year available.
Source: Author’s calculations.

Moreover, closing the gap between minimum and normal retirement ages, or eliminating early exit pathways, could lead to even greater employment boosts, especially in countries with large discrepancies.

Figure 2. Policy simulations changing the gap between the minimum and normal retirement ages

Note: This graph shows the effects of a set of policy changes by country based on the preferred model using the data for the year 2020: the effects of raising the normal retirement ages by 1 year (without any changes in the minimum retirement ages), raising the minimum retirement ages by 1 year; eliminating the early exit pathways, if present, for all the countries in the sample, based on the estimated model.
Source: Author’s calculations.

The right time to policy changes

While the model predicts more substantial long-term benefits of raising the normal retirement age than previously thought, it also emphasizes the importance of timing. Policy changes in retirement ages take time to bear fruit—often decades due to “grandfathering” provisions that protect current workers. Policymakers, therefore, need to act early to mitigate future fiscal challenges.

The OECD’s new model offers a fresh perspective on an age-old policy debate, providing countries with a more refined tool to navigate the complexities of pension reforms.

Reference:

Morgavi, H. (2024) “Is it worth raising the normal retirement age? A new model to estimate the employment effects”, OECD Economics Department Working Papers, No. 1823, OECD Publishing, https://www.oecd.org/en/publications/is-it-worth-raising-the-normal-retirement-age_5f2a3b40-en.html.

Related research and resources:

Turner, D. and H. Morgavi (2020), “Revisiting the effect of statutory pension ages on the participation rate“, OECD Economics Department Working Papers, No. 1616, OECD Publishing, Paris, https://doi.org/10.1787/3f430e2b-en.

Guillemette, Y. and D. Turner (2021), “The long game: Fiscal outlooks to 2060 underline need for structural reform”, OECD Economic Policy Papers, No. 29, OECD Publishing, Paris, https://doi.org/10.1787/a112307e-en.

OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris, https://doi.org/10.1787/678055dd-en.

André, C., P. Gal and M. Schief (2024), “Enhancing productivity and growth in an ageing society: Key mechanisms and policy options”, OECD Economics Department Working Papers, No. 1807, OECD Publishing, Paris, https://doi.org/10.1787/605b0787-en.