Media Briefings

More Generous Pensions Reduce Incentives to Stay in Work, Especially for the Less Educated

  • Published Date: September 2013


Workers in emerging economies who are close to the pension age retire sooner when public pension systems are made more generous. That is the central finding of research on Ukraine by Alexander M. Danzer, published in the September 2013 issue of the Economic Journal.

His study suggests that while pension systems are effective in reducing old-age poverty, they have a strong disincentive effect to stay in the labour market, especially among those with lower levels of education. But raising pension levels does not reduce the propensity to work among those with at least some university education.

The study analyses the impact of an unforeseeable doubling of the Ukrainian legal minimum pension just before the country’s 2004 elections and finds that every third worker who was eligible to take the pension left the labour force. On aggregate, 2.4% of the workforce retired immediately as a consequence of the new benefit generosity. The less educated reacted even more strongly to the reform, raising the average educational attainment of the remaining workforce.

Ukraine’s old-age security system shares several features with the systems in China and Russia, including low retirement ages and low replacement rates. That makes this study an important benchmark case for understanding the effects of future pension reforms. The World Bank is promoting pension reforms around the globe to reduce the fiscal pressure facing many countries, including in the developing world. This pressure has increased as a consequence of the Great Recession.

Given high female labour force participation in Ukraine, the study is also informative about gender-specific responses to incentives. Unlike previous research that compared men and women in Western economies with their substantial barriers for women’s careers, this study finds no indication of differences in labour market behaviour.

The author concludes:

‘Workers in emerging economies increase the pressure on governments to provide social security and to share wealth.

‘Using the pension system as key tool to fight old-age poverty may be quite effective, but it is fiscally expensive and untargeted.

‘The case of Ukraine clearly shows that governments also have to keep an eye on the work disincentive effects stemming from pension systems.’


Notes for editors: ‘Benefit Generosity and the Income Effect on Labour Supply: Quasi-experimental Evidence’ by Alexander M. Danzer is published in the September 2013 issue of the Economic Journal.

Alexander Danzer is at the University of Munich.

For further information: contact Alexander Danzer on +49 (0) 89-2180-2224 (email:; or Romesh Vaitilingam on +44-7768-661095 (email:; Twitter: @econromesh).