Retirement Response to Pension Reforms : Evidence from South Korea

In response to the fiscal challenges posed by population ageing, many governments have raised the normal pension age (NPA). Although the impact of the NPA on retirement behaviors is well documented, little is known about the link between the NPA and other components of pension design. We study how key pension rules, such as the penalty for an early claim and the earnings test, alter the relationship between the NPA and retirement behaviors. Using both aggregate administrative data and national survey data, we show that, in the presence of pension rules with conflicting objectives, the effects of raising the NPA on the claiming and retirement behaviors are weaker or even opposite of what is intended. The impact of raising the NPA on the likelihood of delayed claiming is reduced by 50% when it is accompanied by a six percentage point reduction in the annual penalty for an early claim. Moreover, when combined with a strong age-based earnings test, raising the NPA reduces the likelihood of late retirement, the opposite effect of what is intended. Our findings suggest that the effectiveness of a pension policy change depends crucially on its compatibility with existing pension parameters