The impact of early retirement reform on firms’ employment adjustment

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

Facing low participation rates of old workers and an increase in life ex- pectancy, in the last two decades many developed countries have reformed their social security systems to improve their long-term financial sustainability. In Europe, the starting point for the policy maker has been the increase in the statutory retirement age and the gradual phase-out of early retirement schemes. Against the common trend, the Portuguese legislator approved in 1999 an early retirement reform, allowing older workers to exibilize their retirment decision. In this paper I analyze the e¤ects of the 1999 reform on the retirement decision of the workers and the firms' employment adjustment. I find that after the reform workers retire earlier, and that the reform resulted in a job destruction process as firms do not replace old workers with young and prime age ones. I conclude that the reform failed to stimulate young employment and by allowing workers to retire earlier posed risks to the long-term sustainability of the Portuguese social security system.