Retirement Consumption and Pension Design

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This paper uses patterns in consumption from Swedish administrative data to evaluate the welfare costs of increasing incentives for later retirement. We find that increasing the steepness of the pension benefits profile, as many countries, including Sweden, have recently done, entails substantial redistributive costs. The overall gradient of consumption with respect to the retirement age is steep. Accounting for selection on health and life expectancy reinforces our conclusions about the redistributive cost of these reforms. Apart from the differences in consumption levels, we also find that the drops in consumption around retirement are larger for those who retire prematurely (before 61), while MPCs are lower for those who retire late (after 65). A striking non-monotonicity arises for early retirees (between 61 and 64), who have higher household income and assets. This significantly reduces the redistributive cost of steeper incentives, but only for this specific age range.