Retirement responses to a generous pension reform: evidence from a natural experiment in Eastern Europe

Although a number of emerging countries have successfully introduced non-contributory pensions with broad coverage, very little is known about the labour market and retirement effects of pension systems in the developing world. Looking at the situation in Ukraine, this paper estimates the causal effect of increasing the legal minimum pension on labour supply and retirement behaviour at older ages. The paper estimates a pure income effect that caused additional retirement of 30% to 47%. Identically, it notes that yearly work load reductions were realised by women and low educated service sector workers through adjustments in yearly working weeks. However, the paper underlines that the relatively static nature of the Ukrainian labour market allowed only modest adjustments of individual labour supply at the intensive margin due to the absolute predominance of full-time contracts with inflexible hours.

The paper demonstrates that the natural experiment of the pension increase in Ukraine provides some general conclusions for developing and transition countries:

• an increase in pension income reduces labour supply at older ages for men and women
• the use of a minimum pension guarantee or a flat pension benefit might install strong labour market incentives that will differ for various subgroups of the labour force
• a generous full-coverage pension system is able to achieve welfare objectives
• nevertheless, the success of such a system has to be contrasted with its labour supply effects, fiscal costs and the inter-generational burden
• accordingly, well-informed public welfare policy should take into consideration potential effects on individual labour supply; the substantial pension increase provided strong disincentives to work
• as a result, the policy goal to combat poverty via pension increases might become ineffective and fiscally extremely costly, when the pension aged withdraw their manpower from the labour market