The Timing of Retirement and Social Security Reforms: Measuring Individual Welfare Changes

We develop a compensating variation (CV) measure of individual welfare change from reforms of social security schemes. Within a random utility framework for modeling the individual retirement decision (e.g. the "option value" or dynamic programing models), this measure takes the individual timing of retirement as a response to the reform into account. In the empirical part of the paper an option value model is estimated using Swedish panel data. This model is then used to simulate the effect of a hypothetical reform of Sweden's income security system where eligibility to pensions are delayed by three years. The individual welfare measure is used to assess the overall welfare change as well as the distributional effects.