Abstract

This paper develops a stochastic overlapping generations (OLG) model to investigate the effects of mandatory retirement age policy in an aging economy.  The model has been constructed using a calibration and simulation approach with a view to analyze the impact of extending the retirement age on macroeconomic variables in Thailand.  The results show that a higher mandatory age of retirement is always beneficial in the long run for PAYG pension budgets, government transfers for the elderly, and lifetime consumption.  In this way, the future generations enjoy more consumption than the current generations.  On the contrary, the policy of increasing the mandatory age may be harmful not only in the long run-in terms of capital accumulation but also in terms of the output.  The mechanisms for driving this are two-fold: (1) there is a direct positive effect consisting in an increase of labor supply and lower the length of the retirement period and (2) there is an indirect effect due to the negative change in the wage.