The impact of pension reform on employment, retirement, and disability insurance claims

Abstract We evaluate the 2011 comprehensive reform of Norwegian early retirement institutions using a parsimonious random utility choice model. Conditional on employment at age 60, we estimate a three-state conditional logit model to explain the realized labor market state at age 63 among the alternatives of employment, retirement, and disability program participation. The reform radically changed work incentives and/or pension access age for some (but not all) workers, such that the influence of economic incentives can be identified based on reform-generated variation only. We find that improved work incentives caused employment rates to rise considerably at the expense of early retirement and exit through disability insurance. Improved liquidity through a lower age to access own pension funds on actuarially neutral terms caused a small increase in employment and a large drop in disability program participation. Properly designed pension reforms thus need to take the interplay between old-age pension and disability insurance programs into account.