The Equilibrium Effects of Voluntary Delayed Retirement: Optimality and Adverse Selection.

With Gaston Illanes, Manisha Padi, Bernardo de Moura, and Ursula Schwarzhaupt

Expanding the retirement age has become a major political challenge worldwide. An aging population and declining birth rates have greatly burdened national budgets and decreased labor productivity. As unilaterally increasing the retirement age has faced enormous political pushback, countries are evaluating voluntary delayed retirement. Using a natural experiment in Chile that paid some women to postpone their retirement, we evaluate the takeup of the policy and its consequences on retirees. We use the findings to evaluate the equilibrium effects of voluntary delayed retirement policies on annuitization markets. Crucially, under a voluntary regime, healthier workers delay their retirement more, changing risk selection in annuitization markets. Increased longevity risk among those who delay reduces their annuity offers, pushing against delay incentives and increasing the fiscal cost associated with achieving a target average retirement age. Adverse selection into voluntary takeup can undo the benefits of the policy if not properly implemented. We study the optimal voluntary policy and its welfare and fiscal consequences.