Analysis of the Impact of Pension System Reforms on the Labor Supply Behavior of Elderly Males

Author Name HIGUCHI Yoshio  (Faculty Fellow, RIETI / Professor, Faculty of Business and Commerce, Keio University) /KUROSAWA Masako  (Faculty Fellow, RIETI / Professor, National Graduate Institute for Policy Studies) /ISHII Kayoko  (Keio University Graduate School of Business & Commerce) /MATSUURA Toshiyuki  (Staff, RIETI)
Creation Date/NO. April 2006 06-J-033
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In the face of increasing longevity and rapid aging, the creation of an "active aging society" where highly-skilled seasoned elderly people will be tapped as a valuable human resource is necessary, particularly for the sake of maintaining a vigorous Japanese economy. To this end, it is critical to sustain and manage the public pension program in such a way that does not hamper the willingness to work of otherwise capable elderly people. As part of the reform of the public pension program, the age of entitlement to a fixed amount portion of old-age pension benefits provided under the Employee Pension Program is being raised in a step-by-step process started in 2001. Additionally, from 2002, the Old Age Pension Program for Active Employees, which is to reduce the amount of old age pension benefits paid to those with an earned income at or above a certain level, is being gradually applied to recipients aged 60-65. How have these pension system reforms been affecting the elderly labor supply? To answer this question we estimate two models, using data taken from the Ministry of Health, Labor and Welfare's 2000 and 2004 surveys on employment conditions of the elderly (individual data). One model explicitly incorporates a mechanism in which expected wages for each selected pattern of employment or non-employment and the corresponding adjustments in the amount of pension benefits affect the supply of labor. The other is a reduced form model which is designed to examine the impact of changes in the public pension system to the elderly labor supply by comparing employment situations before and after a specific pension system reform for those in the age group directly affected by the reform as well as for those in other age groups. Our analysis finds that raising the age of entitlement for the fixed amount portion of old-age pensions under the Employee Pension Program has significantly increased elderly labor supply. With respect to the application of the Old Age Pension Program for Active Employees, however, we could not obtain any unified result.