Introducing Retirees into Discrete Labor Choice Models - the Case of Germany

Demographic change poses profound challenges to labor markets across advanced economies. Population ageing is increasing pressure on public social security systems in many countries. These developments have intensified the policy debate on how to extend working lives and increase labor force participation at older ages. Against this background, promoting labor force participation among individuals close to or beyond statutory retirement age has gained increasing importance. In the German policy debate, one prominent example of such an approach is the “active pension” scheme (Aktivrente) recently introduced in 2026. This policy allows employed pensioners to earn additional income up to a specified monthly threshold without being subject to income taxation. While the intended goal of these measures is to encourage voluntary labor supply at older ages, their actual quantitative effects on employment and public finances remain uncertain. Traditional models in pension economics typically conceptualize retirement as a discrete and absorbing state, in which labor force participation ends entirely upon retirement. In light of changing employment biographies and policy initiatives aimed at extending working lives, this limitation has become increasingly problematic. A methodological extension of existing microsimulation models that explicitly accounts for labor supply decisions at older ages, through differentiated transition scenarios, earnings rules, or tax allowances, is therefore required to reliably assess the effects of such reforms. The paper at hand addresses this methodological challenge using Germany as a case study. It examines to what extent microsimulation approaches behavioral adjustments can be further developed to analyze policy measures that create labor supply incentives for pensioners. The paper identifies and discusses both the limits and the potential of extending existing modeling frameworks. We were able to transfer the methodology of microsimulation to the group of retirees, using a microsimulation model based on the German Socio-Economic Panel. Simulations of hypothetical reform scenarios, as well as estimated labor supply elasticities, yield plausible results that are consistent with findings on labor supply responses among the younger working-age population. We plan to advance this model such that labor supply effects of realistic reform scenarios, like the active pension, can be estimated, as well as distributional effects of such reforms. We also plan to study and estimate in further detail the labor supply elasticities of pensioners with the model.