Working Less for Longer: Unintended Effects of Longevity Adjustment of Retirement Age

Using a standard macro model with overlapping generations in the manner of Blanchard-Yaari, we show that by broadening the labour supply on the extensive margin through longevity adjustment of the statutory retirement age, labour supply is likely to decrease on the intensive margin. However, this backlash effect depends on the specific design of the pension system. It is significantly higher under a pay-as-you-go scheme with fixed benefits compared to a pay-as-you-go scheme with fixed contributions and a fully funded scheme based on voluntary savings. The findings have implications for responses to the fiscal and macroeconomic challenges raised by an ageing population.