International Tax and Public Finance

, Volume 18, Issue 6, pp 634–657 | Cite as

Assessing the welfare change from a pension reform

  • Anders Karlström
  • Mårten Palme
  • Ingemar Svensson
Article

Abstract

We study the welfare implications of a hypothetical reform of the Swedish public pension system where eligibility to pension benefits is delayed by 3 years. Using an option value model, we consider the labor supply responses to the reform and develop a compensating variation (CV) measure to analytically assess the individual welfare changes in a random utility framework. We find that a purely budgetary calculation (neglecting individual labor supply responses) overestimates the welfare loss by more than 65%. We also develop a method for testing between a binary and a multinomial option value model, where the binary one is nested in the multinomial model in a Generalized Extreme Value (GEV) model framework. The binary model cannot be rejected.

Keywords

Compensating variation measure Option value model Random utility Social security reform 

JEL Classification

C25 D61 H23 H55 J26 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Anders Karlström
    • 1
  • Mårten Palme
    • 2
  • Ingemar Svensson
    • 3
  1. 1.Systems Analysis and EconomicsRoyal Institute of TechnologyStockholmSweden
  2. 2.Department of EconomicsStockholm UniversityStockholmSweden
  3. 3.Swedish Pensions AgencyStockholmSweden

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