Higher retirement age harms economy

Contradictory to the prognosis of the Netherlands Bureau for Economic Policy Analysis (CPB, Centraal Planbureau), raising the retirement age will have a negative effect on the economy, according to economist Jochen Mierau, based on his own economic model of the macro effects on the economy of matters such as life insurance and savings. He will be awarded a PhD by the University of Groningen on 30 September 2011.

Mierau established that a higher retirement age means a shorter period as pensioner, which in turn means that less money needs to be saved to cover it. As savings are used by banks for investments, which contributes to economic growth, the growth will decrease if too little is saved. Instead of raising the retirement age, the Cabinet should either raise premiums or lower payments, says Mierau.

Economic consequences of ageing population

In his thesis ‘Annuities, Public Policy and Demographic Change in Overlapping Generations Models’ Mierau outlines the economic consequences of the ageing population. His conclusions have probably come too late to influence the pension deal the labour unions have reached with the Cabinet, but Mierau feels that the models he uses will prove to be invaluable in future: ‘The same models can be used to prove that it’s better to tax consumption, for instance as is done with VAT, than to raise income taxes. In the first case wealth is redistributed from the older population who consume a lot to the younger population saving for later. Raising income taxes has precisely the opposite effect.’ Mierau can well imagine that the government has other reasons for raising the retirement age, as the welfare state otherwise is in danger of becoming unaffordable. However, he does strongly encourage that the long-term effect that he has predicted is included in economic prognoses.

Fallacy of composition

Mierau’s research touches upon a paradox that often crops up in economics, known as the fallacy of composition, entailing that if all individuals were to do what microeconomists suggest the public interest would suffer, with as end result that everyone would be worse off. Macroeconomists thus have to hope that not all individuals act so rationally: ‘And luckily that’s not the case’, Mierau exclaims. ‘Many pensioners have also accrued assets that are not shelled out bit by bit for the rest of their life, like annuities. This could be savings, a house or investments. A microeconomist would advise sinking all funds in annuities, so that everything would be used up by the time that people statistically speaking are set to die.’

Inheritance

A side effect of such a ‘perfect’ pension would also be that there would be nothing left for children to inherit. Mierau calls that the ‘tragedy of annuitization’. The tragedy is not only for the survivors but also for society, which sees savings that otherwise would be available for investment swallowed up by consumption. The importance Mierau attaches to saving – while most other economists emphasize the significance of consumption – is not only borne out by the theoretical models that he has developed. Mierau: ‘Empirical evidence also proves we’re right. We have the figures to support our hypotheses.’

Curriculum Vitae

Jochen Mierau (Germany, 1983) studied economics and econometrics at the University of Groningen, graduating cum laude in 2007. His thesis on the macroeconomics of pensions and ageing received support from Netspar (Network for Studies on Pensions, Ageing and Retirement). On 1 September, Mierau became assistant professor of Finance and Financial Markets at the Faculty of Economics and Business at the University of Groningen. He conducted his PhD research at the Faculty of Economics and Business, under supervision of Prof. B.J. Heijdra.

Note for the press

Contact: Jochen Mierau, phone +3150-3633735, email: j.o.mierau rug.nl