In this paper, we explore the links between pension reform, early retirement, and the use ofunemployment as an alternative pathway to retirement. We use a dynamic rational expectationsmodel to analyze the search and retirement behaviour of employed and unemployed workers aged50 or over. The model is calibrated to reproduce the main reemployment and retirement patternsobserved between 2002 and 2008 in Spain. It is subsequently used to analyze the effects of the2011 pension reform in Spain, characterized by two-year delays in both the early and the normalretirement ages. We find that this reform generates large increases in labour supply and sizable cutsin pension costs, but these are achieved at the expense of very large welfare losses, especially amongunemployed workers. As an alternative, we propose leaving the early retirement age unchanged,but penalizing the minimum pension (reducing its generosity in parallel to the cuts imposed onindividual pension benefits, and making it more actuarially fair with age). This alternative reformstrikes a better balance between individual welfare and labour supply stimulus.