Pension knowledge and the effectiveness of pension reforms

This study examines how knowledge about institutional settings and their reform affects the effectiveness of those reforms. We examine this question in the context of social security, the largest social insurance program in Europe, by exploiting time and cross-country variation in pension regulations in seven European countries. We show that many individuals are not well informed about the pension rules applicable to them and that individuals with lower education and lower numeracy skills fail to update their knowledge when affected by pension reforms. Moreover, the effect of pension reforms on individuals’ labour supply decisions is driven by well-informed individuals. This is the first study to separate information gathering from labour supply decision making, thus providing a causal link between the knowledge of pension rules and individuals’ labour supply behaviour. Pension policies could potentially be more effective if individuals were adequately informed.